Cloud Cover: Tech Earnings Not So Bad

If you haven't noticed, there has been a lot of doom and gloom in the market recently. Turns out, a lot of fear about earnings season has not panned out.

With the tech earnings reporting cycle starting to get into full swing, share prices have largely responded positively to earnings reports, even in the case in which there was disappointment. The Nasdaq Composite index is up on the week. This may be starting to indicate that the worst of investor expectations has already been baked in.

Cloud Growth Slowing, But Still There

Growth rates in the major cloud providers such as Amazon, Google, and Microsoft may be slowing, but these are still enormous markets that have a ways to grow. The growth rates are still enormous. Microsoft management reported that Azure is currently growing at 38%, but that will likely be reduced to 30-31% growth this year. Apple, Google, Amazon, and Meta all report next week.

Additionally -- the layoff piece. You would think by reading the news that it's layoff armageddon. But the unemployment rate hasn't risen much and it still hovers near a historic low of 3.5% as the workforce shrinks. The job market is still very strong. Unemployment may rise a bit -- but seems very unlikely to go beyond 5%.

Layoffs are never pleasant, but keep in mind that many of the cloud companies overhired for the pandemic surge, and they are just readjusting their workforces. Amazon's announced layoffs of roughly 18,000 people is only 6% of the company's workforce.

So Far the Slump Is Modest

The media's calls for economic armageddon have been loud and strong for months, but so far it hasn't panned out. Economic data released on Wednesday show the U.S. economy grew 2.9%, inflation-adjusted, in the fourth quarter.

Wall Street analysts continue to monitor data in the technology industries that hasn't turned up any disasters yet. Cloud technology spending and capital spending has been plugging along at a steady clip, as companies look toward investing in their future infrastructure.

Jason Ader, a technology analyst with William Blair, summed it up well in a recent note from that firm's survey of technology Value Added Resellers (VARs):

"VARs saw modest pullback/pushouts in new cloud initiatives. This is partly a response to sticker shock following two years of full-throttle spending as well as ongoing IT labor shortages. In the near term, customers are going through a recalibration, digestion, and rationalization process around their cloud spend, which is driving some resurgence in on-premises spend (and at a minimum a recognition that the hybrid IT model is here to stay). That said, even with VARs expecting some deceleration in cloud spend in 2023, they do not expect a secular shift in long-term cloud migration strategies."

Microsoft Earnings, Telecom Spending Boost Shares

Earnings continue to come up and will ramp up next week, but so far there have been no real disasters. As the numbers come in, it's been clear that we are in the midst of a slowdown, but nothing like 2001/2002 or 2008/2009.

Let's recap some of the other recent earnings news:

• Microsoft earnings were a mixed bag. Revenue was below consensus estimates and earnings were slightly above estimates. The PC and advertising businesses were both worse than expected. Microsoft management said they expect Azure growth to decelerate from the current growth rate of 38% to 30-31%. With all this in mind, Microsoft shares have rallied about 2% since earnings were released.
• Telecom giant AT&T said it would spend $22 billion on capital spending in 2023, which is the same as 2022. It said it expects capital spending to shift down to $20 billion in 2024, indicating that 5G infrastructure spend may be peaking. Meanwhile, the company reported that free cash flow and subscriber growth was strong, with 217 million total subscriber adds, beating estimates of 215 million. Shares are up about 6% on the week. Total revenue was $31.34 billion vs. expectations of $31.38 and earnings came in ahead of expectations at 61 cents per share vs. 57 cents.
• Verizon also reported modest growth. For the quarter ending in December, Verizon reported adjusted earnings of $1.19 per share, down 10% from a year earlier, excluding items. Revenue rose 3.5% to $35.3 billion. The company added 217,000 postpaid wireless phone subscribers, vs. analyst estimates for a gain of 201,000. Guidance for profit in 2023 was in line with analyst estimates. Shares were slightly up on the week.
• IBM earnings were a bit blah. The company exceeded revenue expectations and net income rose 16%, but investors seemed to be disappointed in earnings guidance and shares fell about 5% after the news. See our separate story.

Next week is a huge week for tech and cloud earnings. Some of the companies reporting include Apple, Alphabet, Amazon, AMD, Meta Platforms, Atlassian, NXP semiconductor, Confluent, T-Mobile, and Dynatrace,