Will the economic slowdown take the wind out of the US tech industry’s sails? – The Guardian US

Looming layoffs, rising inflation and fears of an impending recession bode ill for companies’ earnings calls next week
Amid an ongoing slowdown in the tech industry, with potential layoffs looming, investors are expecting another rough season of earnings reports from the sector.
The next two weeks will see earnings calls from Meta, Twitter, Tesla, Google and others – and analysts are warning of more slowdowns, as economic headwinds including rising inflation and fears of recession continue.
“The biggest question now is, how bad is it?” said Scott Kessler, a technology industry analyst at global research firm Third Bridge. “There are a lot of variables to consider, and some areas seem to be holding up while others are getting hit pretty hard.”
Experts say not much has changed since the last round of earnings brought mixed results for companies in the space including Meta, Netflix and Amazon. The backslide on earnings comes after the pandemic brought consecutive quarters of growth for the space, with lockdowns forcing much of the world inside and online.
Analysts are bracing to see if the disappointing results this year represent a halt of Silicon Valley’s golden era or simply an expected slowdown of its explosive growth over the last few years.
Earnings across industries are forecast to slow, with researchers at Factset anticipating a growth rate of 2.4% in the wider S&P Index – the lowest figure since the third quarter of 2020.
As inflation has risen throughout 2022, advertising spending is down across online platforms. Advertising revenue often falters amidst larger economic downturns, experts say, but some companies are being hit harder than others.
In its second quarter earnings report, Meta provided a third quarter guidance that fell below industry estimates, stating it anticipated revenue for the time period to be in the range of $26-28.5bn compared to the Wall Street consensus of $30.52bn.
While broader economic headwinds may be partially to blame, Meta has faced ongoing struggles relating to Apple policies enacted in 2021 that undercut its primary advertising model. The Facebook parent company said the policies, which allowed users to opt out of tracking on iPhone, will cause it to lose out on a projected $10bn in advertising revenue in 2022.
“Ever since that change, Meta has been trying to come up with ad products that provide advertisers with the level of detail that they used to get about buyers, but it has not cracked the code yet,” said Debra Williamson, principal analyst at Insider Intelligence.
The impact is already taking hold, with Meta in September announcing a staff hiring freeze and potential restructuring, leaving many to brace for layoffs. This comes after its July earnings report, in which it projected its first revenue drop since it went public in 2012.
Chief executive Mark Zuckerberg said in light of the impact of Apple’s policies, the company is investing heavily in the Metaverse, a virtual reality platform that Meta will control entirely. The company has struggled, however, to monetize the new sector, forecasting in its previous earnings report that third quarter revenue for Reality Labs – its Metaverse team – will be lower than it was in the second quarter.
Social media firms across the sector are struggling with tough competition in the form of TikTok, which is attracting large numbers of young users, Williamson said. Since 2015, the share of users between the ages of 13 and 17 using Facebook dropped from 72% in 2015 to 34% in 2022. Twitter also saw the share of teens who use its platforms decline from 33% in 2015 to 23% in 2022.
Twitter earnings are widely-anticipated, as the company has had a nearly unprecedented year of drama due to the ongoing saga of whether Elon Musk will purchase the company.
The billionaire made another U-turn on his proposed takeover in recent weeks, deciding to go through with the acquisition just days before a trial over whether he could be forced to carry out the deal was to take place. The twists and turns have not been good for the company, said Jasmine Enberg, principal analyst of social media at Insider Intelligence.
“Advertisers like stability,” she said. “Many of them may be hesitant to spend on Twitter due to all the uncertainty and turmoil surrounding the Musk ordeal.”
In the months since Musk offered to purchase Twitter at $54.20 per share, the company’s value sunk as low as $46 per share, before more recently rising back to $52 after Musk signaled he would buy it after all. Twitter was already struggling to maintain advertisers before the Musk chaos ensued, Enberg said.
“Musk or no Musk, Twitter’s advertising business is in trouble,” she said. “It remains to be seen if this will continue in quarter three amid the ongoing turmoil.”
Not all of the tech sector saw dramatic falls during the last round of reports: Amazon shared stronger-than-expected earnings and a positive forecast for quarter three, expecting revenue between $125bn and $130bn, which would represent growth of 13% to 17%.
Announcements around hiring and layoffs will be an important indication of how the tech sector is weathering the downturn, said Kessler, as many of the companies begin to cut back on the hiring sprees that began during the pandemic.
“I have a feeling we are going to be seeing a lot more indications of cutting spending in the form of hiring freezing and austerity in that area,” he said. “These companies are going to be forced to make some pretty tough decisions.”
Google at last report was weathering the slowdown better than expected, but has not been impervious to the ongoing downturn in advertising spending. The company in July announced it would implement a several-week hiring freeze, widely interpreted as a worrying sign for the company and the tech industry at large.
Other tech companies have already started layoffs, with Snapchat announcing in August it would lay off 20% of its employees. Netflix throughout 2022 has laid off hundreds of employees, as has Tesla.
“Between structural changes to technology and cyclical headwinds from a global economic perspective, I don’t think there’s a tremendous amount of optimism around what these companies are going to communicate in the upcoming reports,” Kessler said.

source

Leave a Comment

Your email address will not be published.