Big Tech is facing an unprecedented stress test—and the next 3 days will be key

With several of the industry’s power players set to release quarterly earnings reports over the next 50 hours—including Alphabet, Microsoft, Meta, Shopify, Apple, Amazon, and Intel, among others—early signs point to widespread havoc throughout the various corners of the tech universe.  

Consider that in the past 24 hours alone:

• Shopify announced immediate layoffs Tuesday morning totaling roughly 10% of its workforce. In a message to employees, CEO Tobi Lütke said the company’s bet on e-commerce growth rates continuing at the same rate as the past two years “didn’t pay off,” forcing him to downsize. Shopify shares sank 15% in mid-day trading Tuesday.
  
• Walmart on Monday unexpectedly slashed its profit outlook for the remainder of the year, as higher food and fuel costs eat into customers’ discretionary spending. The move rattled Walmart e-commerce rivals, including Amazon, and raised the possibility of a broader consumer spending pullback. Walmart’s stock price tumbled 8% in mid-day trading.
  
• Amazon, already poised to report anemic online sales growth, announced Monday it will hike the price of its Prime delivery and streaming service across much of Europe, as inflation and fuel costs eat into margins.
  
• Insider reported Tuesday that Meta employees are expecting significant job cuts, with one high-level employee anonymously forecasting a reduction as high as 10% this year. 
  
• Kylie Jenner and Kim Kardashian ripped Meta on Monday for making Instagram look more like TikTok. (OK, that one won’t impact earnings this week, but don’t sleep on the influencers’ power.)

Those developments follow a cascade of layoff announcements, hiring slowdowns, inflation-driven spending pullbacks, and signs of a weakening digital ad market. Plus, Snap and Twitter already missed second-quarter analyst estimates last week, while IBM produced merely mixed results.

“The true concern in Silicon Valley and Wall Street is that a domino effect happens—Big Tech cuts costs, hurting smaller tech companies that rely on them, who in turn go under or at least cut back on costs such as cloud computing, cloud software, hardware and more, causing more pain throughout the industry,” MarketWatch’s Jeremy C. Owens wrote Tuesday.

As market conditions deteriorate, Big Tech’s four largest power players are about to face an unprecedented stress test of their increasingly vast and expansive businesses. 

Unlike the last major economic downturn in 2008, Big Tech’s big four are significantly more diversified today. That business diversity can cut both ways, exposing companies to additional vulnerabilities as well as providing much needed ballast.

Cloud computing giants Amazon, Alphabet and Microsoft all should benefit from continuing dominance in that market—even if revenue growth is projected to slow down a bit, as The Wall Street Journal’s Dan Gallagher noted. Strong cloud performance should help offset challenges at Amazon (weak e-commerce margins) and Alphabet (cooling ad performance), while Microsoft looks well-positioned to weather the storm as business and enterprise spending remain strong.

Apple, meanwhile, enters earnings season as a bit of a mystery given signs of a softening global smartphone market—though the iPhone maker rarely disappoints Wall Street forecasters.

But if most of that quartet, which have a combined market value of nearly $7 trillion, underwhelms over the next three days, and the Fed delivers an unexpectedly bearish message along with an expected 75 basis point rate hike Wednesday, the worst of 2022 could still be yet to come for Big Tech. 

It’s probably an overly pessimistic outlook headed into the rest of the week. Yet after the havoc wreaked by Shopify, Walmart, and others over the past 24 hours, any result feels possible.

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Jacob Carpenter

NEWSWORTHY

A bipartisan backing. The Senate broke a filibuster Tuesday on a bill providing $52 billion in federal subsidies to the semiconductor industry, clearing the way for the legislation’s passage in the upper chamber, CNBC reported. Senators supported a cloture vote by a 64-32 margin, with all Democrats present and 17 Republicans moving to advance debate on the bill. The Senate is expected to pass a final version of the bill later this week and send it to the House, where Democratic leaders are optimistic they will move the package to President Joe Biden’s desk.

Readying for delisting? Chinese e-commerce giant Alibaba disclosed Tuesday that it will apply for a dual-primary listing on Hong Kong’s stock exchange, aiming to open investment to mainland Chinese residents and hedge against potential regulatory action in the U.S., The Financial Times reported. Alibaba officials are planning for the possibility that U.S. regulators could order the company and other Chinese firms to delist from American stock exchanges due to a failure to comply with audit disclosure requirements. Alibaba’s Hong Kong-listed shares rose 5% Tuesday, while its U.S.-listed shares were unchanged.

A never-ending fight. The Securities and Exchange Commission is investigating whether digital assets marketplace Coinbase failed to register some cryptocurrency tokens as securities, Bloomberg reported Monday, citing sources familiar with the probe. The inquiry follows a years-long debate over whether some digital assets should be classified as securities, with federal regulators providing relatively little guidance to crypto marketplace operators. Shares of Coinbase, which has denied that it sells securities, fell 18% in mid-day trading Tuesday.

Music to their ears. The U.K.’s top antitrust regulator has determined the highly concentrated music streaming market remains competitive enough for its consumers, findings that should relieve regulatory pressure on Big Tech players dominating the space, Bloomberg reported. The Competition and Markets Authority concluded the streaming market is still “delivering good outcomes for consumers,” as Spotify, Apple, Amazon, and Alphabet battle for subscribers. The CMA also determined that streaming services and music labels do not appear to be making “sustained excess profits.”

FOOD FOR THOUGHT

No more Mr. Nice Zuck. The pandemic-driven era of good feelings at Meta is very much over. A new report by The Verge paints Meta CEO Mark Zuckerberg as increasingly annoyed with his subordinates’ inability to match his heightened sense of urgency, as the Facebook and Instagram parent pivots to the so-called metaverse and TikTok continues to eat into its social media market share. Zuckerberg and his leadership team have grown more blunt with staffers about their lack of tolerance for lower-performers, epitomized by a previously reported June 30 all-hands call. New details from that call, along with interviews of current and former employees in recent weeks, show the extent of Zuckerberg’s irritation.

From the article:

During the June 30th call, parts of which were earlier reported by Reuters and The New York Times, Zuckerberg made clear that his company, in its pandemic era of expansion, had become too soft. It was time for a work culture reboot.

“I think during a lot of the COVID period, I kind of bias[ed] towards more flexibility and convenience for people,” he said. But now, he’d noticed people making personal appointments in the middle of the day, making it hard for even the CEO to get everyone to attend a meeting.

“Given the intensity of the environment that we’re in right now,” he continued, “I think now the right way to bias is more towards ‘let’s try to make the decision today, not wait until next week.’” From now on, employees were told to be available for meetings midday California time.

IN CASE YOU MISSED IT

Facebook considers relaxing COVID-19 misinformation policies, by Chris Morris

A COVID outbreak in Shenzhen has forced 100 manufacturers into a ‘closed-loop’ system, threatening a new wave of supply-chain chaos, by Grady McGregor

Billionaire Binance CEO CZ sues Businessweek’s Hong Kong publisher over ‘Ponzi scheme’ language, by Danny Nelson and CoinDesk

Twitter hacker touting the data of over 5.4 million users, including celebrities and companies, for $30,000, by Fortune editors

Beijing is trying to stop Pelosi from visiting the leading supplier of chips to the U.S., warning it is ‘seriously prepared’ to retaliate if she goes to Taiwan, by Nicholas Gordon

TikTok ‘travel hack’ blamed by London Heathrow airport chief for delaying disabled passengers, by Christiaan Hetzner

BEFORE YOU GO

A matter of time. It’s nowhere near on the level with Y2K, but top tech companies are perpetually frustrated by a tiny time adjustment known as the “leap second,” an every-few-years tweak made to keep clocks in sync with the Earth’s orbit around the sun. In response, CNET reported that a coalition of tech giants—Amazon, Meta, Microsoft, and Alphabet’s Google—launched a campaign Monday to scrap this modification, arguing that the headache of making clock changes on time-sensitive computers outweighs orbital accuracy. The quartet joins the U.S. National Institute of Standards and Technology and France’s timekeeping counterpart in advocating for the abolishment of the leap second. So set your watch to it: the UN’s International Telecommunication Union is expected to take up the matter sometime next year.