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With the first quarter 2022 reporting season in full swing, statements from the big tech giants in the US, known collectively as GAFAM, perfectly mirror the difficulties faced by the global economy. War in Ukraine, rising salaries, supply chain issues, tougher regulations and a hike in energy prices – each of these had a direct impact on at least one of the big five tech companies.
Online advertising giant GOOGLE took a direct hit as a result of the war in Ukraine, with the suspension of its advertising services in Russia. But advertising revenues were also depressed across the entire European market since, in any period of uncertainty, advertising budgets are the first to suffer when companies look to reduce costs.
APPLE, the Cupertino-based company, published turnover figures ahead of expectations but revised its targets for the second quarter for two main reasons. The first of these is China, where the current wave of infections is crippling the central government’s zero-COVID policy. Strict lockdowns in Shenzhen (China’s Silicon Valley) and then Shanghai (beset by shipping chaos) will likely mean disruption to production and transportation in the coming months. And secondly, the decision to cut ties with the Russian market is also causing and will continue to cause economic damage to APPLE.
FACEBOOK, recently renamed META, successfully returned to growth in user numbers but earnings were disappointing as it too suffered from the slowdown in the European advertising market. META’s woes this quarter resulted mainly from the new privacy rules implemented by APPLE, aimed at protecting its users’ data, which make targeted advertising less precise and therefore less efficient. For 2022, the group estimates that this will deprive it of the trifling sum of USD 10 billion of revenue. Although this regulation has not come from a public body, we should note the risk it poses to companies of this size.
AMAZON, squeezed by rising salaries and transportation costs, posted losses for the first quarter. Of course, these are to a large extent linked to an unsuccessful investment in RIVIAN – often referred to as the Tesla of trucks – but AMAZON’s e-commerce business is also suffering and has caused it to revise down its forecasts for 2022.
Finally, MICROSOFT, the last letter in the GAFAM acronym but undoubtedly top of the list as regards the quality of its first quarter results, continues to benefit from the potential of the digitalisation trend for its cloud platform Azure. LinkedIn saw revenues rise 34% on the back of a tight labour market. In addition, the Surface hardware division grew by 11%.
Whilst these players are facing microeconomic challenges, the macroeconomy is not working in their favour either in these troubled times. Rates rises automatically undermine their valuations. Since the beginning of the year, price falls in these five companies have been more or less double the drop in the S&P 500. But the success of these giants has been built on innovation and growth, and there still look to be many ways back to growth via the cloud, the metaverse, and hardware innovation. Will a recovery in the big tech companies coincide with that of the global economy?
Written on 29 April 2022 – Olivier de Berranger, CIO