- All the share prices fell on the day of earnings
- Cloud computing growth slowed significantly
Apple (US:APPl), Alphabet (US:GOOGL) and Amazon (US:AMZN) results all disappointed as demand for consumer electronics and advertising continues to weaken in the face of slower economic growth. Apple, which had been holding up well compared with the rest of technology industry, saw its revenue fall for the first time in three-and-a-half years.
Analysts had expected Apple’s revenue to drop by 2 per cent in the three months to December, but instead it fell 5 per cent. iPhone sales dropped 8 per cent while Mac sales were down nearly 30 per cent. Chief executive Tim Cook blamed Covid disruptions, “which significantly impacted the supply of iPhone 14 Pro and iPhone 14 Pro Max”. The Foxconn plant in China that assembles iPhones was hit by Covid lockdowns and protests during the autumn. Things have since settled down, but Apple is aware of the concentration risk of manufacturing so much in China and has been moving some of its assembly to India.
As well as supply chain issues, there are signs that demand for luxury consumer products is softening. Earlier in the week, both Microsoft (US:MSFT) and Samsung (KR:005930) posted disappointing consumer electronics performances, which suggested that Apple’s results would be underwhelming. Rising operating expenses, including an extra $1.4bn (£1.15bn) on research and development, pushed operating profit down by 13 per cent.
These macro headwinds have encouraged broker Jefferies to lower its full-year earnings per share (EPS) guidance for Apple by 6 per cent to $6.10. It expects a bit of a recovery next year, though; only lowering its 2024 EPS guidance by half a per cent.
Amazon’s consumer business also had a difficult quarter. A strong US economy helped North America sales increase by 13 per cent, but international sales fell by 8 per cent. Rising operating costs pushed international losses up by 38 per cent to $2.2bn, while North American losses stayed flat at $0.2bn.
The company has invested heavily during the quarter, with fulfilment costs up 3 per cent year on year to $23.1bn and technology and content costs up 36 per cent to $20.8bn. At the end of last year, it announced a swathe of redundancies to bring these costs under control.
The $5.2bn of operating profit from Amazon Web Services (AWS) meant group operating profit stood at $2.7bn. However, AWS's revenue growth of 20 per cent was a big step down – from 28 per cent in the last quarter and 40 per cent this time last year. Growth was also slower than Microsoft and Google’s cloud computing divisions, meaning that although it remains the largest cloud computing business in the world, Amazon is losing market share. For its next quarter, Amazon is now guiding for between $0 and $4bn in operating profit.
Google’s cloud revenue rose 32 per cent to $7.3bn and promisingly its operating loss narrowed from $890mn to $480mn. Its computing business is going to take on more importance as the advertising business falters. Advertising revenue fell 3.7 per cent to $59bn, with revenue from YouTube dropping by 8 per cent.
This advertising drop-off is the result of macroeconomic conditions, but there is a fear that artificial intelligence (AI) could undermine traffic to its website, causing a structural decline. Microsoft’s investment in OpenAI allows it to upgrade its search engine Bing – a change expected to be rolled out in months. However, Alphabet has its own AI capabilities and chief executive Sundar Pichai said that “in the coming weeks and months we will make these large language models available”.
Amazon, Alphabet and Microsoft all conducted large layoffs at the end of last year after overhiring during the pandemic. These companies thought pandemic trends were permanent, but they have proved to be temporary. Now they are suffering due to the cyclical nature of the economy. The aura around these businesses is fading, but so are their crazy valuations. The economy will turn eventually and so will their fortunes.
