Technology stocks in the verge of a comeback?

The five major US technology companies’ current quarterly results turned out fair to middling. Among the so-called “Big Five”, i.e. Google’s parent company Alphabet, Amazon, Apple, Facebook group Meta and Microsoft, Apple’s figures impressed the most. The other big tech companies such as Google and Microsoft continue to post profits in the billions, but are experiencing the effects of economic worries, restraint by consumers as well as advertisers and a sluggish cloud business.

Apple defied consumer reticence, mainly thanks to iPhone sales. In the last quarter, the company increased its revenue by 8 per cent year-on-year to USD 90.1bn. At the bottom line, profits rose from USD 20.55bn to 20.72bn.

Apple Continues to Profit From the iPhone’s Popularity

The iPhone was a central driver of Apple’s business, with an increase in revenue from USD 38.9bn to 42.6bn. The company itself does not reveal the number of sold units, but according to calculations by analysis firm Canalys, Apple was the only major manufacturer to increase sales – by 8 per cent to 53 million iPhones. Samsung retained the top position in the market with a market share of 22 per cent, but with 18 per cent, Apple is not far behind.

Recently, however, the Cupertino-based firm had to struggle with considerable delivery bottlenecks for its new iPhone 14 Pro. Production in China is currently affected by covid restrictions, Apple announced. China ordered a seven-day lockdown of the industrial park housing the factory of iPhone contract manufacturer Foxconn due to a coronavirus outbreak. According to insiders, the Apple supplier now plans to significantly expand its iPhone capacities in India to compensate for the manufacturing issues in China.

Apple’s Mac computer business also grew from around USD 9.2bn to a record USD 11.5bn amid a rapid contraction in the PC market. In contrast, iPad sales fell from USD 8.25bn to just under 7.2bn. Here Apple cited comparative effects – in the previous year’s same quarter, the then-new models boosted sales. The semiconductor supply bottlenecks, which had partly slowed down business in the past years, no longer play a significant role, said Apple CEO Tim Cook. In the services business, the revenue increased by 5 per cent to USD 19.2bn, growing more slowly than before. Among other things, the business with advertising and games in the App Store slowed down.

Apple’s figures were positively received on stock exchanges and by analysts, and the iPhone manufacturer’s share price rose by 7.6 per cent on the day after the results were published. Compared to the start of the year, Apple shares are still down more than 15 per cent, but have held up much better than those of other tech giants.

Amazon’s quarterly results, presented at the same time as the Apple figures, were punished with a drop on the stock market. Amazon shares lost 12 per cent on the day after publication, and have fallen by almost 40 per cent since the beginning of the year.

Amazon Disappointed With Outlook

The world’s largest online retailer expects a surprisingly weak holiday business in the face of increased inflation and recession worries. The company expects revenues between USD 140bn and 148bn for Q4, while analysts had expected considerably more. The profit forecast caused disappointment: Amazon expects earnings for the year’s last quarter to lie in a very broad range between zero and 4.0 billion dollars.

In the past third quarter, the company earned USD 2.9bn, nearly 9 per cent less than a year ago. Revenue increased by 15 per cent to USD 127.1bn, but also remained below market expectations. Even Amazon’s lucrative cloud division, which offers storage space and online services for other companies, saw its growth slow. Meanwhile, Amazon has announced a hiring pause for the coming months in light of the uncertain economic situation.

Microsoft With Profit in the Billions, but Disappointing Forecast

The quarterly figures of Alphabet and Microsoft were also received with disappointment on the stock market. Microsoft managed to increase its revenue in the summer quarter by 11 per cent to USD 50.1bn, slightly exceeding market expectations. However, an increase of 6 per cent was offset by a 14 per cent decline in net income due to higher expenditure. The revenue forecast of USD 52.4bn to 53.4bn for the current quarter, presented with the figures, fell short market expectations. Microsoft is likely to suffer from the stronger dollar, and the company is also expecting a slump in PC sales and thus also in its business with Windows installations.

Google and Meta Suffer From Declining Advertising Revenues

Google parent company Alphabet has reported a 6 per cent increase in revenue for its past quarter to around USD 69bn. At the bottom line, profits dropped from USD 18.9bn to around 13.9bn. Alphabet also suffered from the decline in advertising revenue: YouTube’s advertising revenue fell from USD 7.2bn to 7.0bn, the first decline since the publication of YouTube’s advertising revenue.

Facebook company Meta experienced a decline in advertising revenue as well. Meta’s revenue fell 4 per cent to USD 27.7bn in the past quarter. Bottom-line profits dropped 52 per cent to USD 4.4bn. In Q2, Meta had reported its first-ever revenue decline.

Meta sees itself a victim of its advertising customers’ thriftiness due to high inflation and worries about the economy. Meta also had to contend with competitors such as the ByteDance subsidiary TikTok and Apple’s new data protection rules. In an initial reaction on the stock exchange, the reaction to Meta’s figures was a price drop.

Zuckerberg Betting on Metaverse

Many investors also feel rubbed the wrong way by Meta founder Mark Zuckerberg’s focus on his vision of the future of the Metaverse. For the time being, the development of the virtual world costs a lot of money, with no profits in sight. In the past quarter alone, the corresponding Reality Labs division posted a loss of almost USD 3.7bn, and Meta foresees further losses for the time being. Zuckerberg, however, continues to adhere to his vision of a virtual world. The Meta CEO recently announced a massive cut of 11,000 jobs, but wants to continue to invest heavily in the Metaverse.

Bet on a comeback of US technology stocks with ERSTE STOCK TECHNO

Stocks of the US tech giants have seen significant price declines this year. In the years before, there were above-average price gains. With the prospect of lower inflation rates in the future, as indicated by recently published data in the USA and Europe, the situation could now ease. ERSTE STOCK TECHNO is an equity fund that invests primarily in technology companies from the USA, including some of the companies mentioned in the blog. This actively managed, broadly diversified fund is a good investment for investors with a corresponding willingness to take risks who would like to use the price reductions to build up positions.

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management

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