Corporate optimism helps the tech sector for now.


Opinion

The latest tech earnings are starting to show a clear divide between areas that are likely to continue to grow and those that are certain to suffer from the global economic slowdown. Driving a recovery in the more resilient sectors, or vice versa, in weaker sectors will be a key issue for us to watch in the coming months.

Most of the major technology hardware names have already reported the numbers for the June quarter and presented their estimates for the second half of this year. These include Apple Inc., Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co., and Intel Corporation.

Overall, we can conclude that consumer spending and spending on consumer goods – short-term or non-essential – is declining significantly. However, corporate demand is strong, especially for infrastructure and equipment such as data centers, communications networks and industrial applications.

Rising inflation is a major cause of uncertainty. U.S. consumer prices rose 9.1 percent in June, the highest level in more than 40 years, and central banks around the world are raising interest rates to tackle the problem. This high spending is hurting the economy, sending the US into two consecutive fourth quarters of declining GDP (so-called technical recessions). Meanwhile, China – the world’s second largest economy – is struggling with Covid-19 lockdowns and a worsening asset crisis.

TSMC was one of the first to deliver its financial report cards and predict the future. If one only looks at this company and not too deeply, one would think that all is well in the world. Earnings beat estimates and the outlook far exceeded analysts’ expectations. But amidst the fine print and pie charts, there was some clarity about what was hot and what wasn’t.

Sales of chips used in smartphones rose only 3 percent from the previous quarter, which did not account for the largest portion of revenue. High performance, which includes processors used in artificial intelligence, data centers and 5G mobile networks, on the other hand, grew by 13 percent. Revenue in this segment has grown nearly 50% from a year ago, according to a Bloomberg poll.

Intel and Samsung’s numbers tell a similar story.

As the world’s largest maker of computer and server central processing units (CPUs), Intel is uniquely dependent on a small slice of the technology industry. It doesn’t look pretty. Consumer Computing Group, which sells chips used in desktop and laptop PCs, fell 25% from a year ago, while operating margins in the segment fell 65%. Its data center segment fell 16 percent, in part because customers who make data center servers are trying to cut inventory, and a large portion of its sales were low-cost chips. In fact, the network and edge segmentation (wired and wireless interfaces) are actually out. More shockingly, Intel cut its full-year revenue outlook by 15 percent.

At Samsung, low consumer demand is hurting memory chip sales, the South Korean giant’s bread and butter, because people aren’t buying as many personal computers. Smartphone sales were also weak, he said. However, the demand for memory used in enterprise applications such as servers is just as robust as the 5G network infrastructure. The company also offered a simple warning – problems in the PC sector can spread to the company’s business. Lattice Semiconductor Corporation, a small designer of specialist chips, showed a similar trend on Monday. The consumer segment fell, while the industrial, automotive and communications sectors rose.

Apple is a curious case. iPhone revenue rose a modest 2.8 percent from a year earlier. However, its services business, including music, iCloud and the App Store, jumped 12 percent. Meanwhile, Mac sales fell 10 percent. We think of smartphones as a must-have consumer purchase, and Apple’s expensive computers are for corporate and niche users like designers and software developers. While these numbers may suggest that a new iPhone is a must-have instead, especially if it’s time to upgrade, buying a fancy new laptop or high-powered desktop is something that can wait a little longer.

There’s a lot to look forward to by the end of this year. Inflation is still out of control, Russia’s invasion of Ukraine continues (affecting energy prices), occasional lockouts are still occurring in China, and tensions are building in the Taiwan Strait. If corporate demand, particularly for long-term communications and data center infrastructure, continues, the technology sector may overtake it relatively unscathed. But if economic instability lasts too long, even those seemingly strong areas will falter.

More from Bloomberg Commentary:

• TSMC has a $40 billion vaccine to prevent inflation: Tim Culpan

• What is more important? Covid zero or three red lines: Shuli Ren

• Early hiking doesn’t mean relaxing later: Daniel Moss

This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. He was previously a technology reporter for Bloomberg News.

More stories like this can be found at bloomberg.com/opinion



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