Tech companies: Wide Spread of Cost- Cutting, Lost of Jobs Still No Profit in View

           

The cost-cutting wave sweeping through the technology sector has not gone far enough to improve the outlook for profits, in the view of Wall Street, amid slowing revenue growth.

Layoffs numbering in the tens of thousands have been announced this year by companies including Microsoft and Salesforce.

The belt-tightening has helped support a rally in the Nasdaq 100 Index, ignited by speculation that the Federal Reserve is near the end of its cycle of higher interest rates. Yet analysts have continued slashing profit estimates for 2023.

Earnings for companies in the S&P 500 Information Technology Index are now expected to contract by 0.4%, down from estimates calling for growth of about 4% just six weeks ago, according to data compiled by Bloomberg Intelligence.

“The demand side is where the uncertainty is,” said Kim Forrest, chief investment officer at Bokeh Capital Partners. 

You can do something about the cost side —  but at the end of the day, if your customer doesn’t feel like your product is adding value at this time, then you’re going to have a shortfall.”

With results in from more than two-thirds of the S&P 500 Index, about 79% of technology companies have managed to exceed the lowered bar for profit expectations, an improvement from the third quarter’s 74% beat rate, according to data compiled by Bloomberg.

Revenue performance, however, is lagging behind, with beats from only about half of the companies in the sector, compared with 59% in the third quarter.

Revenue for S&P 500 technology companies is projected to expand about 2% in 2023. That would be the slowest growth for the sector since 2016, Bloomberg Intelligence data shows.

Results from the largest technology and internet companies during this earnings season were particularly worrisome. 

In aggregate, earnings from Apple, Microsoft, Alphabet, Amazon, and Meta Platforms missed estimates by an average of about 8%, according to data from Bank of America.

In an example of how cost reductions are not offsetting weaker demand, Shopify gave a weaker-than-expected sales outlook late on Wednesday. 

The Canadian company, which lets merchants set up websites for online commerce, was among the first technology giants to slash its workforce during last year’s market rout.

So far, concerns about growth have done little to dampen enthusiasm among investors who have been snapping up beaten-down stocks. The tech-heavy Nasdaq 100 has jumped 14% this year thanks to stocks like Nvidia Corp and Atlassian Corp going up more than 40%.

With stocks gaining and profit estimates falling, valuations in the Nasdaq 100 are on the rise again after tumbling in 2022. 

The benchmark is priced at 24 times profits projected over the next 12 months, compared with an average of about 20 over the past decade.

Bloomberg