Ivana Delevska | Nov 03, 2022 07:30AM ET
The stock prices of Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Google (NASDAQ:GOOGL) were holding up relatively better through this tech downturn. But disappointing earnings have now sent their shares down ~40%ytd. The main driver was disappointing cloud growth for Amazon and Microsoft, and lower advertising spend for Google.
h2 Are cloud investments over?/h2Cloud spending is one area where we expect strong secular growth for years to come. But there are several aspects of the hyperscalers' business model that is not well understood by investors.
All three cloud vendors noted that their customers are in the process of optimizing spend, resulting in slower than expected growth. It is important to point out that growth is still coming at 25%+ but it is lower than previous quarters and expectations.
It was surprising to investors that instead of the hyperscalers focusing on their own profits (or lack thereof), they were more focused on talking about ways they can help their clients reduce costs. As an example, AWS cited several ways in which the company is helping clients reduce costs:
The reason for this is not because AWS is not a profit maximizing entity, but because over time as customers extract more value they will likely move more workloads to their cloud.
h2 Semiconductor earnings collapse/h2Despite all the negative PC datapoints since May, NVIDIA's (NASDAQ:NVDA) warning last quarter, Advanced Micro Devices' (NASDAQ:AMD) pre-announce this quarter, earnings for semis continue to surprise to the downside. But stock price reactions are starting to be mixed, implying that the bottom may be in sight.
The downside, thus far, has been centered in the consumer end-market with data center spending holding up relatively better.
The Macro Backdrop
Yesterday, the Federal Reserve delivered its latest monetary policy announcement, with the central bank hiking rates by 75 basis points, in-line with expectations. The Fed chair speech on the other hand, was significantly more hawkish, resulting in a steep market sell-off.
There were two interesting datapoints to highlight:
What does this mean for industrial tech stocks?
It is important to note that for long term investors, rates moving back to "neutral" from "restrictive" territory, creates an attractive set up, as the return to normal would act as a valuation support. The upside/downside will depend on the earnings trajectory in 2023 and beyond.
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