As major tech companies prepare to release their quarterly earnings reports starting next week, investors are bracing for some bad news.
Several US tech companies have announced hiring slowdowns and layoffs in recent weeks, and the difficulties are expected to continue. “It’s not a good time for technology in general,” said Paul Verna, an analyst at Insider Intelligence, a market research firm. “There is no question that companies will spend less, cut budgets and perhaps implement hiring freezes. None of that is good news for the next quarter.”
Netflix, Meta, Google, Twitter and Tesla have earnings calls scheduled for the next few weeks. The reports will come amid growing fears of a recession as inflation continues to rise. On Wednesday, the US Department of Labor released new data showing the consumer price index rose 9.1% in June from the same month a year earlier, marking the biggest gain since 1981.
The rate hike will likely bolster the Federal Reserve’s plans to raise interest rates, which could further spook investors who fear a slowdown in the economic expansion, said Haris Anwar, a senior analyst at Investing.com.
“The US economy will slip into a recession in the next 12 months if the Fed continues to raise interest rates,” he said. “That’s the main reason we’re seeing a big sell-off in high-growth stocks as investors move their funds into areas of the market that are relatively safe.”
Those high-growth stocks include many in the tech industry. Some investors have predicted a tough earnings season, with Factset researchers anticipating a 4.3% growth rate in the broader S&P index, the lowest figure since the final quarter of 2020.
The sector has been struggling for months. In April, Amazon executive Jeff Bezos issued a stark warning that the tech boom experienced during the pandemic would soon come to an end.
Apple in early 2022 lost its status as the world’s most valuable company, contributing to a 13% drop in the largest Nasdaq Composite in April, a drop of more than 30% from record highs a year earlier.
Meanwhile, many big tech companies have announced cutbacks or reductions in hiring. Alphabet, Google’s parent company, said in a memo to staff in June that it would “slow the pace of hiring” in 2023. Spotify is cutting hiring plans by 25%, according to Bloomberg.
Cryptocurrency exchange Coinbase announced in June that it would lay off around 18% of its workforce, citing a looming recession. On June 3, Tesla told workers it plans to lay off 10% of its workforce and on Tuesday said it would close its San Mateo office and cut 229 jobs there.
“If I had to bet, I’d say this could be one of the worst recessions we’ve seen in recent memory,” Meta CEO Mark Zuckerberg told employees during a weekly question-and-answer session that was recorded and heard by Reuters. Meta plans to cut engineering hiring plans by at least 30%, according to Reuters.
Investors will closely watch Meta’s earnings, due to be reported on July 27, to see if there has been a significant recovery from the company’s disastrous reporting in late 2021 and early 2022. The company lost a record $230 billion dollars in market value. in the midst of a brand change and changes in its business model.
Meta announced in 2021 a change in its business from social networks to virtual and artificial reality. Zuckerberg also previously warned that Apple’s new privacy rules would have a negative impact on the company’s ad revenue.
“Meta is in a period of transition right now as a company,” said Mike Proulx, a researcher at market advisory firm Forrester. He added that the company is also struggling to retain users, particularly younger ones, as they migrate in large numbers to competitors like TikTok.
“Meta has a problem with Generation Z, so the company needs to drive the use of new products like Reels and find a way to monetize it,” he said. “That’s a long-term play.”
Large companies aren’t the only members of the tech sector to be affected, with layoff tracking site Layoffs.fyi showing 36,861 new hires laid off in the second quarter of 2022, compared to just 2,695 employees laid off in the same quarter. quarter of 2021.
However, analysts have warned that the current slump represents a slowdown in the runaway growth of previous years, and not necessarily a collapse.
In the unfolding of the global Covid-19 pandemic, tech companies like Peloton, Zoom, and Netflix experienced meteoric growth as more people relied on technology to work and live online.
That growth is coming to an abrupt end: Netflix, which added more than 36 million subscribers during the first year of the pandemic, has lost more than half its value since it reported disappointing results on April 19 and said in May it would remove about 150 jobs.
“The streaming space is discovering that there are more consumer options than ever before, and consumers will follow where the best content is,” Proulx said. “As more and more subscription services emerge, something has to give.”
Not all members of the tech sector have been equally affected by the recession, Anwar said. While Meta, Netflix and others struggle, companies like Microsoft and Apple are more stable.
“That said, no technology company is immune from pressures coming from rising interest rates, slowing economic growth and rising inflation,” he said. “Their earnings will show some impact from these economic headwinds.”