August 25, 2022

Big Tech to Remain Resilient Despite Macroeconomic Headwinds

In a report published by the Economist Intelligence Unit (EIU), "The macroeconomic environment is worsening" and the "EIU expects global economic growth to slow to 2.8% in 2022, while inflation reaches 9.2%— and big tech companies are not immune to the downturn." The report adds that Alphabet, Amazon, Apple, Meta, and Microsoft, in the quarter ended June 2022, "have reported their softest results in over a year."

According to the EIU, "The slowdown suggests that the strong growth seen as a result of the pandemic is now normalizing. Although big tech companies retain strong assets, such as their market positions, sizes and cash reserves, they will have to cope with weaker demand and higher costs over the next few years."

American enterprises with global operations that conduct commercial transactions in US dollars may be seeing a decline in sales outside of their home market as a result of a strong dollar. The EIU, however, explains that "With the exception of Meta, revenue growth is slowing, not declining, showing that big tech can still find pockets of growth despite the gloomy macroeconomic environment."

Furthermore, "Among the factors hurting big tech in 2022, the strong dollar is the most prominent one: these companies make between 40% (Amazon) and 60% (Apple) of their revenues outside the US. The impact of exchange rates was between 3-4% in the second quarter of 2022, but could reach as much as 6% in the third. We forecast that the euro will start to regain some ground in 2023, but the yen, sterling and some other currencies will remain weak."

In addition to macroeconomic conditions, especially the strong US dollar, are weighing on big tech earnings, the report's key findings include:
  • Meta was the worst affected, reporting its first-ever quarterly revenue decline (-1%).
  • The enterprise side remains strong, with cloud services growing at over 30%; premium services and subscriptions also remain positive on the consumer side.
  • Big tech companies retain huge cash reserves (over half a trillion dollars combined), which will enable them to weather the storm

The EIU encouragingly notes that selling cloud services to enterprises "remain robust for big tech." The UK-based organization further says "High growth in cloud revenue suggests that businesses are sticking with their digital transformation plans despite tougher macroeconomic conditions. They view these investments as important for driving revenue and saving costs in the long term."

The report, however, points out that "The consumer environment was more difficult. As well as weaker consumer demand hitting the advertising market, online retail growth has also slowed (after surging during the pandemic years)."

On the topic of large cash reserves keeping big tech ahead, the EIU predicts that "The five companies will slow down hiring this year and next as they look to contain costs, but this follows a period of heavy hiring—Meta grew its headcount by 32% in the past year." Moreover, "Slower hiring does not suggest a lack of investment or innovation: big tech companies are increasingly competing with each other, and many other players, across a number of markets, such as healthcare, gaming or extended reality, and will continue to do so. Nevertheless, the environment is getting tougher, not only in terms of macroeconomic conditions and the competitive landscape, but also in terms of regulation."

The EIU adds that while it remains "skeptical that the US will pass any major tech laws before the November 2022 midterm elections, the EU has recently passed the Digital Markets and Digital Services Acts. Both will impact big tech companies if properly enforced." As reflected in the image to the right, the tech firms "can still use their size as well as their large cash reserves, which combine to over US$500bn for the five companies, to cope with tougher conditions."

I appreciate how this technology outlook analyzes the recent slowdown, outlines some of the critical challenges facing big tech and why, despite tricky external conditions, EIU expects these companies to remain resilient. What do you think of the report's findings? How are you making your company resilient to macroeconomic headwinds?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

No comments:

Post a Comment