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: A $3 trillion loss: Big Tech’s horrible year is getting worse

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Big Tech companies are taking a heavy beating this week, to the tune of more than $255 billion in lost market capitalization that’s helped make a bad year even worse for the once-beloved sector.

The five tech giants that posted results this week have now lost a combined $3 trillion in market cap on the year, according to Dow Jones Market Data, showing that Big Tech isn’t immune to the macroeconomic storm sweeping up the broader stock market.

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The Big Five tech companies—Alphabet Inc.
GOOG,
+4.41%

GOOGL,
+4.47%
,
Amazon.com Inc.
AMZN,
-7.34%
,
Apple Inc.
AAPL,
+7.51%
,
Meta Platforms Inc.
META,
+1.27%

and Microsoft Corp.
MSFT,
+4.15%

—generated $364.1 billion in aggregate revenue during the September quarter, a staggering sum that led to 9.1% growth relative to the year-earlier quarter. That rate of growth may seem a decent showing for decades-old companies, but it marked a sharp drop-off relative to the pandemic-fueled clips that Big Tech has seen in recent periods. For contrast, the group saw a combined growth rate of 25.6% in the third quarter of 2021.

Even more concerning this quarter, though, was the steep fall in net income seen nearly across the board. The five reported combined net income of $59.5 billion, down 17.8% from the $72.3 billion they logged a year before. In that year-ago quarter, income growth at the Big Five soared 39.1% in aggregate, even as Amazon’s saw its profit halved.

On the whole, the Big Five raked in $1.08 trillion in revenue through the first nine months of the year, up 9.2% from a year before, though both net income and free-cash flow turned lower. The gang recorded $178 billion in aggregate net income in the first three quarters of 2022, down 19.7% from a year before, along with $150 billion in free-cash flow, down 10%.

All five companies logged declining net income when looking at the first nine months of 2022, while Apple and Microsoft were the lone two to see growth in free-cash flow.

Tech companies, like others across the S&P 500
SPX,
+2.41%
,
are dealing with three big issues: a macroeconomic slowdown, higher costs in an inflationary setting, and the strength of the U.S. dollar, which makes purchases in foreign currency more expensive.

“I want to acknowledge that we are still living through unprecedented times,” Apple Chief Executive Tim Cook told analysts on the company’s call on Thursday. “From war in Eastern Europe to the persistence of COVID-19, from climate disasters around the world to an increasingly difficult economic environment, a lot of people in a lot of places are struggling.”

Yet Apple was the standout this quarter, not just because it was the only Big Tech company to register a post-earnings bump in its stock price, but also because it was the only member of the gang to actually grow net income. (Apple’s stock was in fact heading to its best single-day gain since September 2020 amid a 7% Friday rally.)

The smartphone giant’s 0.8% increase in September-quarter net income was nothing to write home about compared with the 62.2% bump that Apple saw in the year-earlier quarter, but it was notable relative to the “carnage” of its Big Tech peers. Apple’s slight rise in net income came even as the company declined to raise prices on its iPhone 14 family despite supply-chain pressures and other challenges.

When zooming out, Apple’s net income is down on the year, however, off 1.1% through the first nine months, according to Dow Jones Market Data. Chief Executive Tim Cook said on the company’s earnings call that the company has seen “inflation related to logistics” and with some silicon components.

The internet sector, though, made Apple’s results shine even brighter, amid competitive and macroeconomic challenges that have been compounded, from a financial perspective, by the determination of Meta and Alphabet to push forward with aggressive spending plans.

Meta was the only Big Tech company to post a revenue decline (-4.5%) in the latest quarter, while at the same time the company’s losses in its Reality Labs business ballooned to nearly $10 billion over the last nine months. Net income in the quarter dropped in half and its stock sunk to its lowest level in six years on Wednesday.

The report marked an even grimmer chapter in a tough year for the company, which has now seen revenue rise only 0.2% through the first nine months of the year, as net income has plummeted more than 36% and as free-cash flow has nearly halved. Meta’s financial challenges could continue as Chief Executive Mark Zuckerberg vowed to plow more money into its metaverse ambitions with Reality Labs spending projected to “increase meaningfully again” next year.

Like Meta, Alphabet is determined to spend, even though it’s shown some signs that it will depart from the ways of old. Executives told analysts on their conference call that they would slow hiring levels in the fourth quarter, to half of the hires brought in during the third quarter. At least one Wall Street analyst said the internet search and ad giant should instead be freezing its hiring, and our colleagues at Barron’s declared that Alphabet needs to go on a diet.

Whereas investors once rewarded fast-growing tech companies for efforts to expand their businesses further, now Wall Street has sent a caution signal. At least two Big Tech companies are paying attention. Amazon Chief Financial Officer Brian Olsavsky told analysts the company was “taking action to tighten our belt,” and Microsoft executives made similar comments in the latest quarter.

“While we continue to help our customers do more with less, we will do the same internally,” Microsoft Chief Financial Officer Amy Hood, said as she noted that Microsoft’s operating-expense growth should “moderate materially” as the fiscal year goes on.

Adding more pressure to Big Tech was the fact that one of the golden sectors of tech — cloud computing — was also slowing down. The top two cloud service companies, Amazon’s AWS and Microsoft’s Azure, saw revenue growth deceleration in the September quarter, while Google Cloud saw revenue slow from the first and fourth quarter of 2021.

It’s worth asking at this point what should comprise Big Tech. Meta is worth far less than chip powerhouse Nvidia Corp.
NVDA,
+4.45%

following the internet stock’s near-record Thursday plunge, and it’s come a long way down from its one-time place as the fifth largest U.S. company by market cap, ranking 21st as of Friday, according to Dow Jones Market Data.

MarketWatch periodically tabulates the results of the biggest tech companies to show the scale and performance of these market titans, but perhaps it’s worth removing Meta from the Big Tech gang as its valuation plummets.

With or without Meta, it’s clear that Big Tech’s fortunes have turned. The big high-double-digit growth days appear to be behind the group and investor expectations have now changed: Wall Street looks increasingly ready to reward companies for their ability to rein in expenses and generate free-cash flow. For now, heady growth is over.

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