Technology stocks have kicked off the year with a roar, staging the kind of spirited, widespread rally last seen during the market’s Covid-era surge. There are nearly two dozen tech tickers on my screen with year-to-date gains of more than 50%, and a handful have already doubled. Investors have concluded that the Federal Reserve’s aggressive campaign to raise interest rates is almost finished—and the market’s pendulum has swung decisively back to greed from fear. Just like the good old days.
(ticker: AI) shares have doubled over the last month, I suspect largely because they have the ticker symbol AI—and there’s nothing hotter right now than all things AI.
(AVYA), an old school telecom hardware company on the verge of bankruptcy, has nonsensically doubled since year-end. The triple-digit gainers include battered merchandise like home goods seller
(W), buy-now-pay-later financing outfit
(AFRM) and, of all things,
(COIN), the cryptocurrency trading house. Makes you wonder if SPACs are about to make a comeback.
In any case, if it’s really true that Federal Reserve Chairman Jerome Powell’s work to slow the economy is nearly done, the market’s focus will shift to other matters, like earnings. And that’s where things get tricky.
The bullish view is we’re going to have a few tough quarters, but that conditions should improve later in the year, once the Fed puts the finishing touches on its tightening campaign. But the latest flurry of large-cap tech earnings signals that the fundamental rebound investors want could still take a while.
Here are my key takeaways from this past week’s batch of reports.
Growth is scarce. While they’re at the heart of many growth portfolios, there isn’t much growth coming from megacap tech companies.
(AAPL) revenue fell 5% in a quarter with 14 weeks, rather than the usual 13, amid weakness in both iPhone and Mac sales.
(META) top line fell 4%—and its guidance implies a 2% drop in the March quarter.
(GOOGL) eked out a 1% gain, but ad revenue was off 4%, including an 8% decline for YouTube.
(MSFT) managed a 2% sales rise, but a 19% drop in its PC segment.
(AMZN) led the pack with a 9% gain, but that includes a 2% decline in online stores. Combined revenue at the five giants rose just 1% in the recent quarter. One. Lousy. Percent.
The cloud is “optimizing.” Growth is decelerating at the large cloud payers. Microsoft and Amazon talked at length about helping customers “optimize” spending. Amazon CEO Andy Jassy showed up on his company’s earnings call for the first time—founder Jeff Bezos ignored them for many years—and said customers are looking for ways to cut budget, and that Amazon is there to help. “We’re going to help our customers find a way to spend less money,” Jassy said. The conversation raises some worrisome questions about potential price wars for cloud services, but for now, the impact is simply slower growth.
The consumer is hurting. Apple’s quarter included some alarming data on consumer spending. Almost everyone knew iPhone sales would be soft—and they were even worse than feared—given recent production issues in China. But Mac sales missed expectations as well, and so did the company’s wearables, home, and accessories segment. On the Apple earnings call, CEO Tim Cook sounded more subdued than usual and repeatedly pointed to the impact the soft economy is having on Apple’s business. Lynx Equity Strategies analyst KC Rajkumar, in a note written just ahead of earnings, warned that Apple could be headed for year-over-year revenue declines not just in fiscal 2023 but also in 2024. Gulp.
Mr. Market is bullish on Mr. Efficiency. The biggest story of tech earnings season is the wild rally in Meta shares. After reporting third-quarter results in October, Meta shares plunged 25% in one day, largely on investor concerns that CEO Mark Zuckerberg was ignoring the short-term financial implications of Meta’s aggressive long-term ambitions. Two weeks later, the company cut 11,000 jobs, and trimmed its 2023 spending plans a touch, triggering a better than 50% rally in the stock.
Zuckerberg learned a few lessons from that experience, in particular that if you want investors on your side, nothing works better than chopping costs. Sure enough, in announcing fourth-quarter results, Meta unveiled a second and more aggressive round of expense cuts, while also installing a new $40 billion stock buyback program. In effect, cash previously headed for the black hole that is the metaverse now appears targeted for shareholder wallets. On Thursday, the stock jumped 24%.
“Our management theme for 2023 is the ‘Year of Efficiency’,” Zuckerberg said. In fact, Meta executives uttered the word “efficiency” 33 times on their earnings call with the Street. What came up a lot less was “the metaverse”—just seven mentions. I would argue that the less Wall Street hears from Zuckerberg on that topic, the better it is for shareholders.
Meta still lost a whopping $4.3 billion during the quarter in its Reality Labs unit, where it works on the metaverse, reducing Meta’s operating income by 40%.
Here’s some reality for you: If Meta stopped spending on the metaverse, maybe by selling, shutting, or spinning off Reality Labs, the company could be dramatically more profitable, while freeing up billions to give back to investors or to invest into the core business. That would certainly be efficient.
Write to Eric J. Savitz at email@example.com