Tech income season: 5 things that have come to light so far

While earnings season isn’t over, enough tech companies are reported to provide some insight into sales trends in many parts of the region.

Here are some of the things that have come to the fore as tech companies big and small over the past few weeks:

1. Chip demand is falling in some markets, while others are holding up well

Companies such as Micron Technology (MU) and Taiwan Semiconductor (TSM) have made it very clear – just in case all other evidence wasn’t enough – that consumer demand for PCs, smartphones and other tech/electronics products has softened. , due to increased pressures and shifts in consumer spending from goods to services (all of which have weighed on demand for low-end products in particular). More recently, weak results/guidance from Seagate’s (STX) and warnings from Corsair Gaming (CRSR) indicate a lack of demand for chips and components moving into consumer tech hardware.

And in some non-consumer markets, OEMs have begun to reduce chip/component inventories – often after making them over the past two years amid shortages – even though end-demand is still fairly healthy. Seagate indicated on Thursday that many customers are ready to cut back on their hard-drive inventory (especially Chinese customers). And on Friday, Morgan Stanley’s Joseph Moore reported (downgrading Micron to an “underweight” rating) Micron customers are “taking a more aggressive approach to inventory management.” Micron said on its June 30 earnings call that its own The list will increase. In the near future.

On the other hand, both Micron and Taiwan Semi indicated that they are still seeing good demand from data center and automotive end-markets. And while Micron and Seagate issued softer quarterly sales guidance, Taiwan Semi issued consensus quarterly guidance and raised its full-year outlook.

In this kind of chip demand environment, I think it’s worth being selective about which chip supplier invests in. Overall, companies whose sales tend to lean toward the auto, industrial and/or cloud data center end-markets – and which ‘see large price drops in sales of commodity products when demand begins to outweigh supply’ – Appear in relatively good condition.

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2. Chip Equipment Demand Still Doesn’t Look Bad Overall

Chip equipment stocks tumbled after memory giant (amidst weak PC/smartphone memory demand) reported Micron’s June 30 earnings report that it is cutting its capex plans for fiscal 2023 (ending August 2023) . But since then, the news flow has been more healthy for the group.

During its Q2 earnings call, Taiwan Semi said it now expects its full-year capex to be near the low end of its guidance range of $40 billion to $44 billion (still above 2021 capex of about $30 billion). But it added due to equipment supply constraints and indicated it would also invest heavily in capital expenditure next year. Similarly, lithography equipment giant ASML cut its full-year sales guidance due to a delay in revenue recognition due to supply constraints, but also reported strong backlog growth and indicated that its potential to scale up. But booked through 2023. And some smaller chip equipment makers, Camtek (CAMT) and Axcelis Technologies (ACLS), respectively, said they now expect their Q2 sales to be at a higher level and above their prior guidance range.

Of course, BE Semiconductor (BESIY), a supplier of chip assembly equipment, issued soft Q3 guidance. And it wouldn’t be surprising if other memory makers like Samsung and SK Hynix also indicated they plan to cut their memory capex.

Nevertheless, the demand for wafer fabrication equipment (WFE) among non-memory chip makers still looks pretty solid, with more capital-intensity for leading-edge manufacturing processes, catch-up expenses for mature processes and efforts (by subsidies). Helped) thanks for factors like that. ) to localize more chip production. And with many chip equipment makers now sporting high-single-digit or low-double-digit forward P/E, their shares now arguably have to be cleared less frequently.

3. Software spending softening slightly

The IBM (IBM) software division missed its Q2 revenue consensus, and (the company expects this year after accounting for forex growth) Big Blue lowered its full-year, dollar-based, revenue guidance. . Meanwhile, SAP effectively did the same, keeping its full-year, euro-based, revenue guidance unchanged, and said on its call that sales of traditional software licenses are being held back as macro uncertainties change long-term. accelerates. Cloud software expenses.

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One can point out here that IBM has been a long-time share donor in software (among other places), and SAP’s comment is not bad for cloud software/SaaS pure-plays. But cloud customer survey software provider Qualtrics (XM) also lowered its full-year guide, while noting on its call that it is seeing somewhat longer deal cycles, and cloud IT services management software giant Service Now (now ) CEO Bill McDermott also suggested. Macro fears are influencing transaction activity.. and comments from Qualtrix and ServiceNow are increasingly supported by sell-side research and other data Pointing to a reduction in software deal activity.

Software is still taking up its share of IT spending, and SaaS businesses’ reliance on recurring revenue streams protects some of them during recessions (not to mention appeals to potential acquirers). But with deal activity apparently slowing – perhaps outside of high-priority areas like security – there is potential for more guidance/estimate cuts for the sector. And while some software firms are now pricing in what is arguably some bad news, some still hold higher valuations.

4. Online advertising spending is being hit hard – especially with more discretionary types of advertising buying

Snap’s (SNAP) Q2 shareholder letter — in which the company declined to provide Q3 guidance and said its Q3 revenue is flat year-over-year — more than confirmed fears that digital advertising budget cuts are happening because Various businesses in their Belt Twitter (TWTR) Q2 report, in which the company posted a $140 million revenue miss and declined to provide Q3 guidance (citing its pending/disputed deal to be acquired by Elon Musk), reported. did not do much to calm the nerves of investors.

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It’s worth noting that both Snap and Twitter have strong exposure to brand ads and app-install ads. When businesses panic about macro conditions, the former has long been an early casualty, and the latter has apparently been an early crash due to macro pressures, changes in Apple’s (AAPL) user-tracking policy, and a lot of public and private tech. Being affected by a mix of tough financial conditions. companies.

Demand trends may not be Fully Just as bad for some of the big online advertising players. Last week, online advertising agency Tinuity shared fairly good Q2 data for its customers’ Google (GOOGL) search ad spend, though reporting a meaningful decline in the annual growth rate for their YouTube ad spend. However, at a time when many companies are eager to cut costs and a tight job market often makes them reluctant to undertake major layoffs, many of them have to watch their advertising/marketing spend, at least for a while. it’s easy.

5. A strong dollar is a major deterrent for US multinationals

This shouldn’t come as a shock to anyone tracking the dollar’s performance against currencies like the euro and yen. But still, this earnings season is revealing some forex hits which are very attractive.

Forex was a 7-percentage-point headwind for IBM’s second-quarter sales growth, and Netflix’s (NFLX) was a 4-point headwind for second-quarter growth. In addition, the companies anticipate 8-point and 7-point forex headwinds for the third quarter, respectively.

Look for several other US tech companies with significant international sales to report given similar top-line pressures due to the stronger dollar.

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