Oct 26, 2022
Alphabet, Microsoft spark US$300B megacap rout
Lorne Steinberg discusses Alphabet
Technology powerhouse Alphabet Inc. thrilled investors during the bull market by consistently reporting stronger-than-expected sales and earnings. Those days are over.
Disappointing quarterly updates from the Google parent, as well as Microsoft Corp. and semiconductor giant Texas Instruments Inc., triggered a selloff threatening to wipe more than US$300 billion in market value off some of the biggest U.S. companies. The news is foiling bets that this year’s US$5.5 trillion selloff in tech stocks had reached bottom.
The quarterly updates underscored growing pressure on everything from corporate IT budgets to digital ad spending and chips for industrial machinery. Nasdaq 100 Index futures slipped 1.6 per cent in early trading Wednesday as the results refocused investor attention on the damage to earnings and the economy from the Federal Reserve’s rapid interest-rate hikes.
“The global economy is at a tipping point,” said Jessica Amir, strategist at Saxo Capital Markets. “The stronger dollar will continue to hurt businesses’ forward earnings, at a time when consumer demand is likely to fall with the reverse wealth effect expected to grip markets. Pressure remains on riskier asset classes such as tech.”
Alphabet now has reported three straight quarters of disappointing earnings per share, according to data compiled by Bloomberg, the longest such streak in seven years. Prior to this year, the company had beaten estimates nine quarters in a row, and had only missed once since the end of 2017.
Analysts and investors have been too optimistic this year about other tech giants reporting this week: Facebook parent Meta Platforms Inc. and Amazon.com Inc. each have missed on revenue in three of the past four quarters, the data show. Meta publishes earnings after the market closes Wednesday, with Amazon and Apple Inc. to follow on Thursday.
Signs of weakness were widespread in Tuesday’s results. Microsoft posted its weakest quarterly sales growth in five years, throttled by the surging dollar, slumping PC demand and faltering advertising revenue.
Microsoft’s forecast points to a serious slowdown, said Anurag Rana, an analyst at Bloomberg Intelligence.
“This guidance is worse than we had anticipated and shows that enterprise IT spending is decelerating at a faster pace amid rising economic woes,” Rana said.
At Alphabet’s most important financial engine, the search and related businesses, sales rose less than analysts estimated as spiraling inflation crimped growth in digital advertising. Microsoft sank 6.5 per cent in premarket trading, while Alphabet declined 6.7 per cent.
The selloff in extended to other consumer and tech giants, with Amazon dropping 3.6 per cent. Those that derive sales from online advertising followed Alphabet lower, with Meta and Pinterest Inc. dropping 4.4 per cent and 3.9 per cent, respectively.
The Nasdaq 100 has plunged 28 per cent this year, on course for its worst annual performance since 2008.
The demand outlook was particularly dire in the semiconductor industry, which had been one of the hottest sectors during the pandemic. Texas Instruments, whose chips go into everything from home appliances to missiles, saw shares tumble after its weak forecast signaled that the chip slump is spreading beyond computing and phones into other businesses. The stock lost 4.6 per cent, while Analog Devices Inc., ON Semiconductor Corp., and Marvell Technology Inc. also dipped.
While falling demand for chips used in consumer electronics has been well documented and baked into shares, semiconductors used in the industrial and automotive sectors were still in short supply.
Tech Chart of the Day
Top Tech Stories
- After reporting earnings and revenue that missed expectations, Alphabet said Tuesday it would slow hiring and control expenses, signaling that it was girding for tough times ahead as the economy falters.
- Microsoft gave a lackluster forecast for sales growth in its Azure cloud-computing services business, a closely watched measure of corporate demand, sending the shares reeling in early trading Wednesday.
- Mobileye Global Inc., the self-driving technology company owned by Intel Corp., priced one of the biggest U.S. initial public offerings of the year above its marketed range to raise US$861 million.
- Elon Musk pledged to close the acquisition of Twitter Inc. by Friday in a video conference call with bankers helping fund the deal, according to people with knowledge of the matter.
- Foxconn Technology Group is seeing a “small number” of COVID cases at its main campus in China, as the world’s biggest maker of iPhones aims to maintain production amid tightening restrictions in one of the country’s largest cities.
- Texas Instruments and SK Hynix Inc. offered a gloomy view of the chip market in their latest quarterly reports, dashing hopes of a quick rebound for the US$550 billion industry.
- Billionaire Snap Inc. founder Evan Spiegel rubbished the idea that future computing will migrate into a virtual world dubbed the metaverse, arguing most people prefer a lighter touch known as augmented reality.
- Spotify Technology SA tumbled as much as 10 per cent in late trading after the company, the leader in music streaming, said profit margins may narrow this quarter because of programming costs, and that it’s considering raising prices in the U.S.