Written by / Zhao Zikun
Editor / Dong Yuqing
In the past decade, thanks to global monetary easing and technological progress, U.S. stocks have experienced a super-long bull market. Among them, technology companies represented by “FAANMG” performed particularly well.
FAANMG, refers to Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), Microsoft (MSFT), Google (GOOGL). At the moment, in addition to Netflix, which stands out, FAANMG has fallen into five: Apple bid farewell to double-digit growth, Amazon’s revenue is far less than expected, Meta’s net profit has been cut in half, Microsoft’s revenue growth has hit a five-year low, and Google’s core advertising revenue has declined… …
Overseas, the dividends of the epidemic have faded, consumer spending has slowed, the Federal Reserve has aggressively raised interest rates, and inflation has risen. Technology stocks that were once high-spirited have lost their strong appearances in the past, and various companies have also begun to cut spending, freeze hiring, and quietly layoffs.
Silicon Valley giants, have to get used to living a hard life.
Dismal earnings season, stock prices tumble
In the past week, the latest quarterly financial reports of American technology giants have been released. The financial reports show that the performance of the three giants Microsoft, Google, and Meta (formerly Facebook) was collectively dismal. Compared with the performance in the second quarter, the performance continued to deteriorate, with low revenue The growth rate, net profit collectively dropped sharply, and sub-businesses showed weakness.
Microsoft’s revenue rose 11% last quarter, while net profit fell 14%. As the main force of Microsoft, the revenue of Windows system and Office software has dropped significantly. On the contrary, the revenue of search and news advertising has increased, but the growth rate is not fast. After the earnings report was released, Microsoft’s stock price fell off a cliff, down more than 7%.
Alphabet, Google’s parent company, missed expectations for revenue, profit and operating margin in the third quarter: Although revenue rose 6% year-on-year, it fell short of analysts’ expectations of 9%, the slowest growth rate since 2013 outside the early days of the new crown epidemic. The operating profit of US$17.135 billion fell by 18.5% year-on-year, compared with the previous market forecast of a year-on-year decrease of 6.3%.
In addition to the cloud business, which had better-than-expected revenue and losses, the services business, which includes the core advertising and search business, Android and Chrome browsers, hardware, Google Maps, Google Pay, the Play Store and YouTube video platform, also In the innovative business segment, both revenue and profit were lower than expected.
What’s more, Google’s advertising revenue only increased by 2.5% year-on-year, which is not only far lower than the 43% year-on-year increase last year, but also not as good as the growth rate of more than 7% expected by analysts. A more dangerous sign: Google’s core search advertising business has experienced a sharp slowdown in revenue growth, and even YouTube, the most stable “cash cow” business, has experienced a first-ever decline in advertising revenue.
When it released its earnings report, Alphabet management mentioned that it found that search advertising spending in some areas has decreased, finance is the industry with the largest decline in advertising, and advertising in the insurance, lending and cryptocurrency industries seems to be close to stagnation. He also highlighted the negative impact of a stronger dollar on company performance.
Google’s parent company CFO Porat (Ruth Porat) said at the earnings analysis conference that advertisers are tightening ad spending, reflecting their growing concern about future uncertainties.
After the financial report was released, Google’s stock price fell off a cliff. It fell from $105 to around $95 on the 26th. After the opening bell on the 27th, it smashed again. It rose slightly in the late session, but it was still hovering around $93.
The worst share price plunge was Meta, which plunged nearly 20% during the session. According to the financial report data, Meta’s revenue in the third quarter was 27.714 billion US dollars, a year-on-year decrease of 4%, and was lower than market expectations of 27.4 billion US dollars. Even more frightening is that the net profit was 4.395 billion US dollars, down 52% year-on-year.
Giants learn to live a hard life
U.S. tech companies have led the U.S. economy for the past decade, boosting the stock market even during the worst days of the virus pandemic. Now, amid rising inflation and interest rates, even Silicon Valley’s biggest giants are signaling that tough times may be coming.
For nearly three years, companies have kept employees at home, schools have moved classes online, and the impact of the Covid-19 pandemic has allowed tech companies to take advantage: employees and students spend big on smartphones and computers; businesses buy cloud storage and video Meeting software to support remote work; people stuck at home turning to online shopping; and small businesses having to spend heavily on digital advertising to capture potential customers.
Spurred by aggressive consumer spending during the pandemic, tech companies have ramped up spending to keep up with demand. Now, as consumer spending slows, they need to struggle to adapt. The decline in overall revenue comes as Silicon Valley giants face pressure to cut costs and layoffs are coming in the tech industry.
In fact, Meta has been preparing for layoffs since the third quarter. In late September, Zuckerberg publicly acknowledged plans to slash budgets, including freezing hiring, reducing budgets for most teams, reorganizing some teams, and optimizing resource allocation. At the moment, Meta once again made it clear at this earnings conference that for the next period of time, it will only invest in the company’s highest priorities, and will significantly reduce the growth of other teams’ headcount.
Google has also begun to temporarily slow hiring, with CFO Borat saying the company could hire more than 6,000 workers in the fourth quarter, half of what it did in the third quarter. And according to the signals revealed at this meeting, the trend of Google’s staff reduction will continue into next year.
Starting last week, Google suspended recruitment for half a month, and each project team re-evaluated the current human resource needs. Google CEO Pichai explained, “When you’re in growth mode, it’s hard to find the time and opportunity to recalibrate that you need, and the current period gives us that opportunity.”
Google’s once proud “80/20 rule” (allowing employees to devote 20% of their time to experimenting with innovative businesses) is no longer in the limelight. Now Google emphasizes that it wants employees to increase productivity by 20%. After a period of high growth, it becomes particularly important to increase the output ratio per unit of time.
As early as July, Microsoft carried out a layoff of thousands of people, and two months later, Microsoft announced that it would cut 2,100 people in the second round of layoffs and close the Silicon Valley Research Institute.
In addition to layoffs, Silicon Valley technology companies have invariably begun to urge employees to return to offline work. Apple will soon begin requiring employees to be present three days a week, with some companies canceling remote work altogether. Twitter and Google are the first to rule that working from home means taking a pay cut.
The market is difficult to pay the innovation account, and the high valuation returns to normal
Over the past year, Google’s parent company Alphabet has lost nearly $700 billion in market value, making it the giant with the largest market value loss, while Microsoft, Meta and Amazon have lost more than $500 billion in market value. Add in Tesla and Netflix, and the six tech giants have lost more than $3 trillion in market value in a year.
The collective slowdown of the giants has exposed a weakness: Over the years, they haven’t been able to find a new, highly profitable idea. Despite investing in new businesses over the years, Google and Meta are still largely reliant on ad sales. The iPhone is still a driver of Apple’s profit growth 15 years after it upended the industry.
Slowing growth in tech giants has naturally poured money into emerging businesses, with less-than-stellar results.
In particular, Zuckerberg’s strategy of “comprehensively transforming the metaverse” has not been approved by Wall Street: the market value has dropped by nearly $600 billion in a year. As of the current quarter of this year, its much-watched metaverse business, Reality Labs, has lost more than $9 billion in cumulative losses. Among them, the new horizon world metaverse social platform, which was unveiled not long ago, was criticized by people that “the picture quality is not as good as that of PC games in the 1990s”.
Despite the constant negative comments, Zuckerberg has repeatedly said that he will continue to develop towards the metaverse, which makes people worry about the future of Meta: the stock price fell off a cliff on Wednesday, from around $130 to $107. It continued to fall on Thursday, closing around $97, its lowest level since 2016. Founder Zuckerberg’s net worth was as high as $142 billion last year, ranking fourth in the world, and currently there is only more than $36 billion left, ranking outside 20.
The bottomless pit of “Metaverse” investment makes people see no end. Under the gloom of the overall economy, investors are more optimistic about businesses with stable cash flow. The high valuation stories brought about by past cash burn have been difficult to win market confidence.
Although technology companies have lost more than a trillion dollars in market value in just one year, Feld, the founder of the Felder report, wrote that the rout of big technology companies may have just begun.
If you compare the combined market capitalization of Microsoft, Apple, Nvidia, Tesla and Amazon to their combined free cash flow, Feld said, the forward price-to-earnings ratio is more than 50 times, down from 70 times in early 2022.
Such historic levels of overvaluation are possible only if the Fed prints massive amounts of money to support cash flow and money multipliers. However, now that inflation is raging, the money printing machine is starting to reverse, and valuations are starting to return to normal.
Previously, the epidemic and economic stimulus measures have driven a surge in demand for the products and services of large technology companies. When the positive factors disappear, it will create a demand vacuum for a long time. Coupled with the tightening of Fed policy, it is even worse for technology companies. .
In the face of the “continuous deterioration” of the performance of technology giants, Pacific Investment Management Company (PIMCO) recently stated that it will continue to increase its bets against U.S. stocks.
On Oct. 26, Erin Browne, a portfolio manager at PIMCO, said that short positions are being gradually set to higher levels, saying that the tech giant’s recent earnings woes bode well for what’s next in the market: “The decline isn’t over.”
Just last month, Bank of America predicted that due to continued inflation and the Federal Reserve’s violent interest rate hikes, the earnings growth space of U.S. stock-listed companies will shrink, and the S&P 500 may even fall back to around 3,000.
That said, the downward pressure on big tech valuations from Fed tightening is just beginning.