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| Economic winter is coming? Silicon Valley tech giants send bleak signal |
Google reported a sharp drop in profit this week . Social media companies such as Meta say ad sales, the core of their business, have cooled rapidly. Microsoft, perhaps the most reliable performer in the tech sector, is also expected to see slower growth through at least the end of the year.
Technology companies have led the U.S. economy over the past decade and lifted stocks during the worst days of the coronavirus pandemic. Now, amid stubborn inflation and rising interest rates, even Silicon Valley's biggest titans are signaling that tough times may be ahead.
These companies are solving the same problem as the rest of the economy. They boosted spending to keep up with demand, spurred by aggressive consumer spending during the pandemic. Now, they will struggle to adapt as consumer spending slows. But it won't be easy.
Amazon, which had 798,000 workers at the start of 2020, is reining in the expansion of its warehouse operations , mooring buildings, retiring leases and delaying plans to open new facilities. The company hired 1.52 million people in the second quarter, nearly 100,000 fewer than at the end of March.
Most companies can't wait to meet these problems with the leaders of the technology industry. Google and Microsoft posted $31.5 billion in profit in the most recent quarter. Apple is expected to announce on Thursday that the company posted a profit of more than $20 billion in a quarter that was otherwise disappointing.
But their sudden slowdown exposed a weakness. For years, Big Tech didn't really find a new idea that would turn out to be highly profitable. Despite spending years investing in new businesses, Google and Meta still rely largely on ad sales. Fifteen years after disrupting an entire industry, the iPhone remains a driving force behind Apple's bottom line.
That leaves some of these companies vulnerable to disruptive technology startups, which they themselves were once. Google-owned YouTube and Meta's Facebook and Instagram social media platforms are being disrupted by the much younger TikTok. Meta said on Wednesday that its profit in the most recent quarter was down more than 50% from a year ago
The slowdown has been particularly sharp for companies in younger markets such as cryptocurrencies and the gig economy, but also among more stable chipmakers. The value of bitcoin has plummeted by two-thirds this year, dragging down many start-ups. Ride-hailing pioneer Uber has cut expenses as investors have lost patience with a lack of profitable business.
Semiconductor companies are cutting spending on factories and machinery as sales of personal computers, smartphones and home appliances slow. Texas Instruments told financial analysts on Tuesday that the contagious trend is spreading to sales of products such as temperature controls and factory robots. China's coronavirus-related lockdowns and the growing threat of trade and technology restrictions have made the situation worse.
"We're going to have a dark winter," said Brent Hill, a technology analyst at investment firm Jefferies Group. "Small companies to bigger companies to mega corporations — no one is immune."
Google and Microsoft this week assured investors they would slow down hiring and monitor rising energy and supply chain costs. Apple has said it plans to think more carefully about how to expand its workforce amid the economic downturn.
Other companies are embarking on new strategies. Netflix, weakened by slowing subscription growth, is hoping to revive its business next month by launching a lower-priced service subsidized by advertising .
Meta is pouring billions of dollars into building the so-called Metaverse, hoping to become the next big thing in tech. But the investment cost the company money. Meta said its Reality Labs unit, which handles virtual and augmented reality work and is at the heart of the Metaverse, lost $3.7 billion, compared with $2.6 billion a year ago.
"Yes, I know a lot of people may disagree with this investment," Meta CEO Mark Zuckerberg said on a conference call with financial analysts on Wednesday. "But as far as I know, I think it's going to be a very important thing, and I think it would be a mistake not to focus on these areas, which I think are going to be critical going forward."
For nearly three years, technology companies have grown rapidly as companies have kept their employees home and schools moved classes online. The impact of the new crown epidemic has played to the industry's strengths.
Staff and students spend big bucks on smartphones and computers. Businesses are supporting remote work by purchasing cloud storage and video conferencing software. People stuck at home have turned to online shopping, forcing small businesses to spend heavily on digital advertising in hopes of grabbing potential customers.
As it turns out, it's impossible for tech companies to keep up that growth. Global sales of smartphones and computers are slowing. Businesses beset by a slowing economy are scrutinizing spending on cloud computing. Shoppers have gone back to the stores and are spending money on tours, concerts and sporting events — physical experiences they once sacrificed.
Apple is expected to report on Thursday that iPhone sales rose 7% in the fiscal year ended September, a sharp slowdown from last year's nearly 40% growth. Wall Street analysts predict lower sales next year as consumers in the U.S. and China, the two largest markets, grapple with a slowing economy.
A similar shift in computer sales could exacerbate Apple's woes and drag down longtime rival Microsoft. The computer market is deteriorating at the fastest pace in decades. That decline has dragged down Apple's Mac business and led Microsoft to expect Windows sales to drop about 30 percent in the final months of the year.
"There are so many PCs bought in the past two years that there is no demand at all now," said Mikako Kitagawa, a technology analyst at market research firm Gartner. "Plus, hiring is frozen so businesses don't need new PCs."
Microsoft has previously shrugged off sluggish computer sales with the explosive growth of its cloud-computing product, Azure. But that business has softened as cloud computing customers seek to reduce spending.
Azure sales rose 35%, Microsoft said Tuesday, a slowdown from earlier in the year. Industry analysts expect Amazon, which reports earnings on Thursday, will also say that growth in its cloud computing business has slowed.
The industry's weakness started with a slump in online ad sales. Problems in that business started to take shape earlier this year, when Apple rolled out privacy changes that made it harder for Meta and Snap to target digital ads. On Wednesday, Meta warned that it did not see any signs of easing in the decline in the ad market.
"We've got a long way to go," said Steve Milunovich, a veteran Wall Street analyst who now advises technology companies. "This reset is long overdue."
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