analysis
Status: 11/18/2022 5:39 p.m
Whether Meta, Alphabet, Microsoft or Amazon – US technology companies are cutting many jobs and saving costs. An entire industry seems to be in crisis. In fact, it continues to generate billions in profits.
By Thomas Spinnler, tagesschau.de
It’s an unusual picture: the enormously successful and market-dominating technology groups, which have been spoiled with billions in profits for many years, are massively pressing on the cost brakes. The technology group Amazon is apparently facing the next wave of layoffs, Meta, Alphabet and Microsoft are also cutting staff, deciding to stop hiring or looking for other ways to save.
Many investors have recently turned their backs on the stock market, and share prices have come under massive pressure. Are some of the tech sector’s dominant companies on the cusp of radical change – or is it just a snapshot?
Digital advertising continues to grow
First, each of the companies deserves a look at their own strengths and weaknesses. After all, each of the large corporations has an individual business model. Like the search engine group Alphabet, Facebook’s parent company Meta is primarily dependent on digital advertising. In the past third quarter, Alphabet generated around 80 percent of its sales with advertising. Meta’s business model is also almost entirely dependent on online advertising. Meta thus generates well over 90 percent of its revenues on the Facebook and Instagram platforms.
The future of these companies therefore depends crucially on the future of the digital advertising market. Taymour Tamaddon, portfolio manager at T. Rowe Price, is optimistic: “The strong tailwinds that have fueled the rapid growth of digital advertising over the past decade are largely intact. And the same tailwinds that will continue to support growth in the future should,” says the expert.
According to Tamaddon, the past few months have shown how quickly companies are cutting the digital portion of their entire marketing budget during the crisis. However, the digital advertising market will remain robust, not least because of the considerable advantages of digital technology such as better targeting and measurability. It seems highly unlikely that the business models of Alphabet or Meta could be seriously jeopardized.
Cloud service as a guarantee of profits
The technology group Amazon is not positioned in the same way one-sidedly, even if more than 80 percent of the turnover is generated with the marketplace. That’s why inflation- and recession-related consumer reluctance is definitely a factor Amazon is taking into account. But the group’s business model has long been more diverse. The AWS cloud division in particular has been a growth driver in recent years. Vontobel’s experts write that it is responsible for a large part of the group’s profits, even if growth slows down.
Microsoft also earns money in a wide variety of segments and is therefore less susceptible to crises. In addition to the well-known office software or the gaming area, which has recently been massively upgraded through acquisitions, this also includes the cloud business. According to Vontobel, this accounted for around half of Group sales in the past quarter.
Growth no longer quite so turbulent
However, it’s evident that the division’s pace of growth has slowed after gigantic rates in the past at both Amazon and Microsoft. According to estimates by the consulting firm Gartner, the cloud business will remain a global growth market worth billions for companies in the future, albeit at a slower pace.
But is that cause for concern? If the pace of growth in Microsoft’s cloud division slows from 50 percent to 35 percent, it’s hard to call this bad news, Gartner expert John-David Lovelock told US broadcaster CNBC.
Four highly profitable companies
A look at the current quarterly balance sheets from Meta, Amazon, Microsoft or Alphabet shows that the crisis that some observers are seeing in Internet companies in particular is something that most companies around the world would probably wish for. In the most recent quarter, they collectively earned nearly $40 billion. These are highly profitable companies.
The investor Florian Heinemann explained in the weekly newspaper “Die Zeit” why they are still looking so closely at the costs: In a critical economic situation, the stock market looks less at growth and more at how profitable a company is. “Companies whose share price has slipped in recent months must now signal that we are making sure to remain profitable,” says Heinemann.
It is then also a matter of reducing personnel costs in relation to sales. “If a company wants to increase its profits, people are usually laid off in order to save their salaries and thus costs,” is the investor’s conclusion.
Search for new business
In the long term, the corporations are still “extremely well positioned,” says capital market strategist Stefan Risse from Acatis asset management. Microsoft, the Google mother Alphabet and Amazon in particular have now become a kind of “supplier in everyday life”. In addition, the companies have repeatedly shown that they can react quickly to changes and crises – and tackle new business areas with high pressure.
Apparently, the boss and founder of Meta, Mark Zuckerberg, is currently trying to do this with his Metaverse project. The development is currently devouring billions of dollars, which is partly responsible for the austerity course of the social media network. Whether the investment will pay off one day remains uncertain. Nevertheless, Meta apparently has sufficient reserves to take the risk.
Zuckerberg doesn’t want to start making money with the Metaverse for about ten years. After the success with Facebook, it would be another bet on the future that the multi-billionaire wins – or his first real failure.