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Good morning. Yesterday was a remarkable day on Wall Street. The riskiest stocks rose significantly, perhaps in response to Wednesday’s Fed meeting. Tech stocks Nasdaq rose more than 3%. The ARK Innovation ETF he’s up 6% and now he’s just over a month and he’s up 50%.
What’s interesting about this is that these so-called “long duration” stocks (where many expected values lie far into the future) didn’t move in response to large changes in interest rates. Yes, 2-year and 10-year Treasury yields are about 10 basis points lower than they were before Fed Chairman Jay Powell started talking.But that doesn’t seem like a big enough move to appreciate the frivolity of yesterday. levelwhat we are seeing is probably expected volatility of future rates. This lowers the risk premium of speculative equities.
But even that wouldn’t be reason enough for this amazing “Escape to the Cité” (as our sleazy colleague Robin Wigglesworth put it). called it). Rallying today reeks of momentum chasing and fear of missing out. Everyone, take a deep breath. And send us your thoughts: email@example.com and firstname.lastname@example.org.
Big Tech Trifecta
Yesterday afternoon, three of the world’s largest and most important companies released their results in unison. If asked to sum up reports from Apple, Alphabet, and Amazon in one word, it might be “sober.” Big Tech talk was all about big opportunities and great customer experiences, but the trio also sang in unison about difficult economic times, slowing revenue growth and the need to control costs. was A word about each:
After adjusting for foreign currency headwinds, revenue growth at Apple is only 3% from an unexpectedly sharp slowdown a year ago, partly due to iPhone supply chain issues. did not. The company expects growth to be similarly modest this quarter. The CFO carefully pointed out that expenses were below the company’s targets.
Alphabet’s earnings slowed as well. Currency-adjusted sales growth was 7%, down from 11% in the previous quarter. There has been a lot of talk about “redesigning the company’s cost base.”
Amazon posted a slightly better-than-expected 12% profit, but the outlook for the first quarter looked weak (the company is known for under-promising). Cloud computing revenue growth slowed to 20% in the quarter and to the mid-10% in January. The company expects its cloud business to face economic headwinds over the next few quarters. “Efficiency” was often talked about in the retail industry.
Alphabet’s comments on cost control efforts were particularly interesting. CFO Ruth Porat said:
In the first quarter of 2023, we expect to incur approximately $500 million in charges related to lease terminations to bring office space into line with our adjusted global headcount. . . This is reflected in the company’s costs. We continue to optimize our real estate footprint. . .
Beginning in Q1 2023, we have adjusted the estimated useful life of servers and certain network equipment. We expect these changes to have a positive impact on 2023 operating results of approximately $3.4 billion.
It’s interesting in itself that real estate and server accounting are areas where Google is looking to cut costs. But it’s especially interesting given that his CFO of Meta said the same thing the day before.
The second component of the lower cost outlook is cost of goods sold. . . Depreciation here was impacted by extending the life of non-AI servers in the fourth quarter. And the third factor is our outlook, which reflects an estimated $1 billion in facility integration costs.
Recent writing On Big Tech’s need to reduce costs, we’ve focused on the tradeoff between productivity and innovation.These companies spend billions of dollars on projects that may or may not make good business I’m here. It’s natural to question whether ideas like Starry Sky should be abandoned. But how much can these companies save by belting out pedestrian areas such as real estate that just happens to be exposed to innovation?
One thing is for sure, businesses will not find lasting savings by extending the financial life of their servers. This reduces depreciation expense, which is a non-cash item.
(The point about “facilities consolidation” also has implications for the real estate industry. Office REITs like to brag Big Tech as their top-tier customers. may be somewhat less.)
It’s interesting to see the market’s sluggish reaction to these three essentially similar reports (significant slowdown in revenue, lots of cost promises). All three stocks fell in after-hours trading, but not as much as they rose in regular trading. Investors seem to be treating the slowdown in sales as a cyclical change rather than a long-term one, and are considering it.
We can’t blame investors for being believable. All three have very strong competitive positions in industries that are likely to grow faster than the economy in the next few years. If the single-digit sales growth is temporary and cyclical, then Apple and Alphabet share prices look very fair (not as obvious as Amazon). On the other hand, if the slowdown in earnings proves to be permanent, the relationship between Big Tech and investors will fundamentally change.
one good read
There’s a lot to agree and disagree with in The Cut’s new etiquette rule.
https://www.ft.com/content/b567fb36-719c-491e-87d5-7848e991225a $5 Trillion ‘Meh’ Earnings | Financial Times