Trending declines: Tough times ahead for tech

Next few quarters could be difficult for the tech sector. If there's a slowdown in digital retail, digital advertising, or cloud services, it will inevitably be reflected in the sector's performance

Social networking giant Meta suffered a catastrophic 25 per cent drop in share price in one session after it announced corporate results for the July-September quarter. The stock has lost over 75 per cent in the last 12 months. Alphabet has also seen a sharp decline in share prices over the past one year. Amazon has seen a 38 per cent decline in market value during the same period and suffered a 12 per cent drop in share prices after it released results. These drawdowns are not isolated instances. The Nasdaq-100, which features 100 of the world’s largest listed tech companies, has lost an overall 27 per cent in the last year. Amazon, Alphabet and Meta have all declared results that were a long way below expectations with missed revenue and earnings estimates. The managements offered gloomy guidance about the future, cautioning investors about slower growth. Other tech companies have also warned about similar threats to margins, and growth slowdown.

Between them, Alphabet, Amazon and Meta garner an aggregated 75 per cent of global digital advertising revenues, which is expected to hit around $300 billion in calendar 2022. But there’s been a slowdown in advertising, online and offline, which is symptomatic of a slowdown in global economic activity. Advertisers always cut back on spending during recessive conditions. The “Big Three” also face increasing competition from Twitter, Apple, Snapchat, Spotify, Yelp, Roku, Walmart, Instacart, IAC, Pluto TV, and Tubi. Each of these entities has carved out a billion dollar-plus presence in digital advertising despite a tight market and, as a result, margins have been pared. In addition to the presence in advertising and cloud services, Amazon is, of course, the largest online shopping space. Therefore, weak guidance for October-December is a red flag, signalling low global consumption demand. This quarter is especially important since it is the festive season in most first world countries and is expected to usually generate disproportionately higher revenues.

In company-specific trends, Alphabet pointed to a shift in viewership trends, which is having a negative effect on YouTube revenues. Meta has also not found a way around Apple’s new privacy measures, which cut down targeted advertising options. Apple is also taking a larger share of Meta’s ad revenues through its revised app store revenue share policy. YouTube has seen fast growth in the “Shorts” segment featuring videos of short duration, formatted for smartphone screens. This is heartening in that it gives YouTube a toehold in a space hitherto dominated by TikTok. But it has proved difficult to generate ad revenues from shorts. Meta, meanwhile, estimates it will lose at least $10 billion in revenues due to Apple’s “App tracking transparency” measures that allow iPhone users to opt out of being tracked by default. This has made it very hard for Meta to deliver targeted advertising, which is its stock-in-trade. At the same time, the metaverse, where Meta hopes to carve out dominant market share, is not yet a revenue-accretive environment.

These are all mature businesses, which are simply too large to deliver counter-cyclical performances in their key markets. If there’s a slowdown in digital retail, digital advertising, or cloud services, it will inevitably be reflected in their performances. However, smaller, more nimble businesses, including start-ups, are also likely to have problems navigating such an environment. Investors have turned cautious as they have suffered capital losses.