Tech’s continuing financial dominance has been a huge part of Wall Street’s surge during the COVID-19 pandemic, but it appears that the supply-chain problems hurting other industries will not skip Big Tech.
Amazon.com Inc. AMZN,
The information technology companies in the S&P 500 SPX,
Others could suffer from the lack of chips, including Apple, which is reportedly lowering its iPhone 13 production targets due to semiconductor and component shortages. While some analysts believe any iPhone sales that Apple misses out on will just show up in later quarters, analysts are still trimming Apple’s estimates for the back-to-school and holiday shopping seasons.
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“There are pieces of IT — the tech sector — that will do really well, and others that won’t do that well,” said Brendan Connaughton, founder and managing partner of Catalyst Private Wealth in San Francisco. “Tech will grow a little faster than the market as a whole.”
Amazon, which seemed to be situated perfectly for the pandemic with its dominant online-shopping and cloud-computing businesses, has seen expectations drop rapidly since sales growth slowed more than expected in the second quarter. FactSet Senior Earnings Analyst John Butters noted that analysts’ average estimates for Amazon earnings dove from $12.89 a share to $8.92 a share during the third quarter, leading to the biggest decline in earnings expectations for any of the S&P 500’s 11 sectors during the period, -7.6%. Expectations have since declined to $8.90 a share, after Amazon put up earnings of $12.37 a share in the third quarter of 2020.
Even with that decline in expectations, some analysts predict Amazon could surprise on the negative side, after seeing a surge in costs that are likely to affect its profits. The company has been investing heavily in its logistics build-out and has been spending billions on its delivery network and rising employee costs, while other issues have grown.
“Persistent supply-chain issues, which will likely extend well into 2022, could present a risk to our forecast,” Cowen & Co. analyst John Blackledge said of Amazon in a recent note.
Amazon’s highly profitable growth engine, AWS, is also slowing down a bit. Evercore ISI analysts said they are looking for AWS revenue to grow 34% on a year-over-year basis, compared with 37% growth in the most recent second quarter.
“Cloud will grow but not at the rate it has been growing at,” said Maribel Lopez, principal analyst at Lopez Research, referring to the cloud-computing market in general. “Clearly everyone who needed cloud has started it, but will people still be growing at 40%?”
One of the biggest explosions in tech spending during the pandemic has already showed a slowdown, and is also related to the supply-chain struggles and semiconductor shortage. During the pandemic, many consumers and businesses upgraded their computers for remote work and teleconferencing, leading to a huge boom in the PC industry.
But that boom appears to be done, for now.
“I think numbers will be solid but won’t show that exponential growth that we saw over the last few quarters,” said Lopez. “Now people around the world are up and running with whatever they need to be up and running with. The next big [purchasing] wave won’t happen for another six months.”
Market-research firms Gartner and IDC said that worldwide PC units growth had returned to low single digits in the third quarter, with Gartner reporting unit shipments grew 1% and IDC projecting PC growth of 3.9% in the third quarter. Demand hasn’t slowed as much as the ability for PC makers such as HP Inc. HPQ,
“The PC industry continues to be hampered by supply and logistical challenges, and unfortunately these issues have not seen much improvement in recent months,” IDC analyst Jitesh Ubrani said in a statement.
HP is going to be one of the hardest hit companies. According to FactSet, analysts are estimating a 1.32% growth rate for revenue in its fiscal fourth quarter, which ends in October. That almost flat growth follows a stunning 27.3% surge in revenue in the July quarter, fueled by consumer PC sales and printing.
The news isn’t all bad for tech. The chip shortage is expected to again pay off for semiconductor companies — as a group, semis and semiconductor equipment are forecast to see earnings growth of 38.5% in the third quarter, with revenue growing on average 22.9%.
Stacy Rasgon, a Bernstein Research analyst, said recently that the trends are “fueling bullish feelings from semiconductor companies themselves, most of whom are calling for shortages and strong order patterns to maintain well into next year,” and added that his inbox is flooded with queries from investors asking how long the current growth can last.
“Investor conviction appears to be increasingly waning as they continue to worry that the peak must be approaching, and maintain considerable uncertainty as to how much of the current demand environment is real, versus phantom given the normal customer behavior in times of shortages is to order more than they need in hopes of getting enough parts to get by.”
The sole chip maker that is not expected to see any growth in the third quarter is chip giant Intel, which has been under a cloud after some chip delays in the past year and its big push to spend more on contract manufacturing. Analysts expect to see flat third-quarter earnings and nearly flat revenue compared with the year-ago period, while competitors like Advanced Micro Devices Inc. AMD,
The tech-related sector that looks the strongest besides semiconductors is communication services, which includes Facebook Inc. FB,
Facebook is expected to see 37% revenue growth in the third quarter, showing its ability to bounce from one controversy to the next in recent months without paying for any of them. The threat to the social-media powerhouse, as well as Google and other Big Tech companies, comes from lawmakers looking to change the Section 230 protections that content platform companies enjoy, along with other legislative and regulatory concerns — if other concerns don’t get in the way.
“I think that Washington, D.C. has enough fish to fry,” Connaughton said. “They probably won’t get to tech for another six months.”
Whatever happens on the regulatory front is not likely to have much immediate impact on the financial reports we will see in the coming weeks. The roiled supply chain and semiconductor shortage, though, will take at least a pound of flesh.