It wasn’t as bad as everyone thought. In the year After the worst stock market performance in 40 years in the first half of 2022, tech stocks — which bore the brunt of the selloff — bounced back on earnings reports that weren’t so bad.
With interest rates rising, supply chain woes continuing, and the “R” word being talked about (recession), there was plenty of volatility to keep the market moving. But the main issue is that interest rates are rising, reducing the premiums assigned to technology stocks.
But as the tech earnings season ends, tech markets have calmed down as earnings beat investors’ expectations and were mostly healthy.
Winners: Cloud Leaders, Networking, Cyber Security
Cloud still represents the biggest long-term opportunity in technology investment, with massive, long-term digitalization efforts underway. In the past decade, the pillars of cloud technology markets have been cloud giants including Amazon, Google, and Microsoft.
BELLEVUE, WA – December 3: Microsoft CEO Satya Nadella addresses shareholders during the Microsoft. … [+]
In the land of technology, fears of recession seem overblown. Amazon, Google and Microsoft have slowed down but are still growing and making huge profits. for example:
- Amazon grew 7 percent year-over-year (y/y) despite some weakness in its core consumer market. Amazon Web Services (AWS) is still growing at 37%.
- Microsoft’s revenue grew 12 percent and posted a staggering $16.7 billion in profit — so it’s not in danger of going out of business. Azure is growing at 40% per year.
- Google’s overall revenue grew 13% and revenue from Google Cloud Platform (GCP) grew 36% y/y. Net profit fell 14 percent, but still came in at $16 billion.
Networking giant Cisco allayed the fears of many investors, on the news on August 18, the stock reported revenue of $13 billion, net income of $2.8 billion, down from $200 million a year earlier. Investors had expected worse after the CCC revised expectations during fiscal third-quarter earnings in May. Cisco shares, however, rose 12 percent against the market in June.
One remaining concern for Cisco investors could be erosion in market share, as smaller players like Arista Networks and Juniper Networks appear to be gaining momentum.
Arista reported Q2 revenue of $1.05 billion, a 47% y/y increase. Arista has been gaining traction in large cloud data centers, but is now chipping away at Cisco’s core enterprise accounts.
Shares of Juniper Networks showed the strength of its cybersecurity portfolio and new cloud products. Net revenues were $1.3 billion, an 8% increase year-over-year and a 9% increase. Non-GAAP net income was $136.4 million, a decrease of 3% year-over-year and an increase of 34% sequentially, resulting in non-GAAP net income of $0.42
Palo Alto Networks, which competes with Cisco in the cybersecurity market, reported fiscal Q4 revenue up 27% to $1.6 billion and billings up 44% y/y, indicating strong demand going forward. Shares rose about 11 percent on the news and are now trading around $570, a 52-week range of $420 to $640.
Some key cybersecurity vendors have yet to report, with Crowdstrike reporting next week and Zscaler expected to report on September 8.
Losers: Oracle layoffs and Fortinet shares down
So who has failed like this? Let’s look at tech companies that haven’t demonstrated the same quality and strength as some of the cloud leaders.
Oracle is still extremely profitable but doesn’t seem to be keeping up with the growth of cloud leaders and has generated some bad news with mass layoffs.
In June, Oracle reported fiscal Q4 revenue of $12 billion, up nearly 6%. Cloud revenue was $2.9 billion, up 19% year over year. But the big news came with the layoffs, which shook the morale of many employees a little. Major news outlets reported hundreds of layoffs, although others, such as Forbes, put the layoffs at as high as 3,000. Oracle itself is not disclosing the amount of the discounts. In June, Oracle reported $191 million in restructuring costs, including a significant restructuring of its workforce.
More bad news came from NVIDIA, which had to revise its expectations for the year as growth slowed significantly. In yesterday’s earnings call, NVIDIA reported a 3 percent year-over-year increase in second-quarter revenue to $6.7 billion. Most of the weaknesses were in the gaming sector, which was cool in the post-epidemic environment and NVD was overstocked with graphics cards.
Despite these struggles, NVIDIA’s data center business still looks strong. Data center revenue rose 61% year-over-year to $3.8 billion, driven by higher cloud customers.
Supply chain issues persist.
Supply chain is a theme that continues to emerge during the tech earnings season as tech companies grapple with post-pandemic supply chains.
According to a recent survey by electronics supplier Avnet Silica released in May:
For the first time in recent years, 100% of the revenue calls discussed supply chain issues across 12 different sectors.
· Of the 20 sectors focused on supply chain issues, more than half depend on electronics for manufacturing, and more than a quarter are involved in food and grocery supply.
· Inflation, supply chain and talent top the list of growing concerns for company executives and their investors, with inflation the fastest-growing topic on earnings call agendas this year.
· Supply chain concerns continue to grow, with airtime accounting for 60% of revenue calls across all industries in 2022, compared to 47% in 2021.
This revenue season has shown that supply chain issues can be a long-term struggle, as China’s economy faces a pandemic-related shutdown and political tensions with the West rise.
“We are navigating our supply chain transition in a difficult macro environment and we will get through this,” said Jensen Huang, NVIDIA’s CEO, founder and CEO, on the earnings call.
Cisco CEO Chuck Robbins pointed out that the state of the supply chain needs to improve. “Overall supply constraints began to ease slightly in the middle of the fourth quarter and continued into early Q1,” Robbins said at the corporate earnings conference.
This earnings season is still wrapping up, so supply chain sentiment data isn’t available yet — but it remains one of the most talked-about issues in the market.
