The currents are ferocious. The cost of borrowing money is at an all-time high, and it’s only going to get worse from here. It was the highest inflation rate in decades. As a result, fewer dollars are being spent by consumers. Speculation about a recession is on the increase, as well, according to analysts. We’re still dealing with the pandemic, supply-chain concerns, the dollar hitting multiyear highs versus European and Asian currencies, which is putting pressure on profitability, and Russia’s conflict in Ukraine is raging at the same time. That set off the worst first half of the US stock market in almost half a century.
As I wrote last week, experts are scrambling to reduce estimates for a wide range of IT firms in light of the recent avalanche of bad financial and geopolitical news. A “clearing event” and better market performance later might be established by the discussion of second-quarter results and what will be soft guidance for the rest of the year. You must bear in mind the vast number of shoes that must be dropped and losses that must be borne.
Keep an eye on these six themes over the next several weeks for additional developments:
Speculations are exaggerated: Most Wall Street predictions are “stale” and do not represent current economic realities, according to technology sector expert Ted Mortonson of Baird. As far as mega-caps like Apple, Intel, Meta Platforms, and Microsoft are concerned, the chances of guide-downs from these companies are quite real (MSFT).
It’s Dan Niles of the Satori Fund who believes that the outcomes and recommendations will be much worse than anybody expects. According to him, Microsoft, Micron Technology MU+ 0.69 percent (MU), and Target all reduced their forecasts, which is concerning (TGT). “People should be frightened about how rapidly this stuff is moving,” says Niles.
Memory chip company Micron’s latest earnings report had a troubling prediction for PC unit demand in 2022. There is a 10% decline in Micron’s revenue. Dell Technologies (DELL) and HP Inc. (HPQ) both held out optimism that business PC demand would stay healthy despite previous quarters seeing a decline in consumer PC demand. Nonetheless, that now seems to be impractical. Gartner (IT) expects a 13% reduction in consumer PCs this year but a 7% drop in commercial PCs.
According to Gartner, tablet sales are expected to decline by 9% and mobile shipments by 7% as well. On Thursday, Taiwan Semiconductor (TSM) will release its financial results, and then Intel, Advanced Micro Devices (AMD), and Microsoft will follow suit later in the month. Still an advocate of Microsoft over the long run, it has already made an uncommon move by cutting its Q2 profit outlook to reflect currency headwinds, and the weak PC market may cause an earnings surprise.
Micron’s August quarter forecast shortfall was “far worse than the Street had anticipated,” according to Baird’s Mortonson, who believes the “semiconductor trade is in genuine peril. He believes that this type of huge deficit might be a frequent pattern in second-quarter results and third-quarter expectations for semiconductors, and that chip stocks could fall by another 15 to 20 percent from this point on.
Avoid cloud bursts: Amazon Web Services, Microsoft Azure, and Google Cloud Platform are still the best options for large-scale cloud computing in the corporate sector. Fearing a recession, many businesses are cutting back on expenditure. Heads are being shaved at Netflix (NFLX). Meta’s hiring has slowed down. Snowflake’s (SNOW) last-quarter results were weak due to cost-cutting measures taken by a few clients. Since initial public offerings and special-purpose acquisition corporations (SPACs) no longer exist and private values are declining, venture-backed startups are scaling down. Video streaming, e-commerce, and other forms of internet media are all experiencing difficulties.
According to Piper Sandler analyst James Fish, as a result of decreased engagement on streaming and e-commerce sites, internet traffic growth has halted. The issues plaguing the consumer internet in the second quarter may be worse than previously thought. As the competition tightens and customers reduce their expenditures, net subscriber losses are expected to be worse than the two million that Netflix has predicted. We’ll get the first glimpse when Netflix reports on July 19.
There is a chance that Amazon.com’s (AMZN) online retail division will decrease by more than 2 percent in the third quarter, after a 3 percent dip in the March quarter. For the first time, Meta’s second quarter might see negative growth. “Signs of deteriorating consumer demand and recession risk,” said Evercore ISI internet analyst Mark Mahaney, who made “substantial” cutbacks across the industry.
Companies including Airbnb (ABNB), DoorDash (DASH), Etsy (ETSY), Pinterest (PINS), and Peloton Interactive (PLOT) rely on customer discretionary spending and brand advertising for the majority of their revenue (PTON). According to Niles, with over two-thirds of ad expenditure now taking place online, this presents a huge risk in light of the current economic slowdown.
Independent Solutions Wealth Management portfolio manager Paul Meeks believes the one question you will hear on earnings calls is about a recession. Is there a chance of a recession? “No CEO will openly respond, but every firm must speak about it,” he says. If you don’t dramatically decrease your prediction, no one will trust it. It’s time to remove the band-aid. “This thing’s a kitchen sink!”
