How Tech Companies Will Fare During Inflation, Recession: Analysts

• Tech stocks got battered this week after earnings reports signaled choppy waters ahead. 
• While Apple is a “bright spot,” Meta, Alphabet, and others are in for a tough few months, analysts say. 
• Still, those firms are better equipped to weather it than Meta, which needs to refocus on its core business, according to analysts. 

Famed investor Warren Buffett has a saying he likes to use: “You don’t find out who’s been swimming naked until the tide goes out.” 

Well, the tide’s going out.

All signs point to choppy waters ahead — for tech giants, the people they employ, and the users they serve. Job cuts appear to be imminent at several of the companies, ongoing inflation means people and corporations are reining in their spending, and the specter of a recession it still looming large.

The pandemic may have made some tech companies astonishingly rich, but the environment in which they’re trying to make money now is simply … harder, New York Stock Exchange Senior Market Strategist Michael Reinking told Insider on Thursday.

“It’s clear that there are headwinds for the industry after a period of unsustainable growth coming out of the pandemic, iOS privacy changes, growing competition and macro headwinds,” Reinking said.

So, if things are getting bad, how are the big tech companies likely to fare? And which companies might be in dire need of a swimsuit?

Apple

Apple is in the best shape, a “bright spot” amid otherwise grim big tech earnings, Wedbush analyst Dan Ives wrote in a note. Barclays analyst Tim Long called the iPhone-maker “a relative safe haven in the macro storm,” according to Market Watch.

The privacy changes it enacted — by allowing people to fine-tune their settings to disallow ad tracking — put a dent in competitors, but only furthered to strengthen Apple’s operating system moat.

And slightly worse-than-expected iPhone sales didn’t dim the company’s otherwise strong quarter. Overall customer resiliency seemed to surprise even CEO Tim Cook, who said during a conference call with investors that “demand was strong and better than we anticipated that it would be.” 

Alphabet

Google parent Alphabet’s quarterly results were a less-than-pleasant surprise for Wall Street. The company experienced a slowdown in its search-advertising business. This is a concerning sign about the economy more broadly, as ad budgets are often the first to go during periods of belt-tightening. 

“Alphabet’s weaker-than-expected search ad sales show how deeply the fear of a recession is gripping consumers,” Nikhil Lai, a senior analyst at Forrester, told Insider by email. 

Still, Alphabet’s “leading market share and irreplaceable scale” mean it will be “largely sheltered from the worst of economic storms,” Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, wrote in a note. 

Amazon

Amazon’s mixed third-quarter earnings sent its shares tumbling, wiping out $120 billion in market value as of Friday. The company’s issued a weak holiday forecast, estimating that sales will likely be below analysts’ expectations during the fourth quarter. 

But Wall Street is still optimistic about the e-commerce giant, with JPMorgan writing in a note that “the pressures on AMZN’s business are largely macro-driven, and not fundamental.” That is to say: It’s the economy they’re worried about, but the company as a whole is in decent shape. 

Microsoft

Microsoft saw its slowest quarterly revenue growth in half a decade, but analysts are optimistic about the software giant’s fate, despite its lackluster guidance for the upcoming quarter. Goldman Sachs analysts wrote in a note Tuesday that there’s potential for a rebound next year.

“Looking beyond near-term dynamics, we remain constructive as we see the company well positioned to continue to win deals and expand its wallet share within its existing customer-base, even in a slower growth environment,” analysts wrote, according to CNBC. 

Meta

Meta’s second straight quarter of revenue declines, plus its weak forecast, sent shares cratering following the company’s earnings Wednesday. Investors are especially worried about the money it’s plowed into the metaverse: Reality Labs, Meta’s virtual reality and metaverse division, reported $9.4 billion in operating losses so far this year, and Zuckerberg said the company plans to spend even more on the metaverse next year.

Meanwhile, Insider Intelligence principal analyst Debra Aho Williamson wrote that Meta needs to focus on fixing its core business — like Facebook and Instagram — and that the company, whose stock has fallen more than 70% so far this year, “is on shaky legs.” 

“Meta is under incredible pressure from weakening worldwide economic conditions, challenges with Apple’s App Tracking Transparency policy, and competition from other companies, including TikTok, for users and revenue,” she wrote. 

Morgan Stanley downgraded the company’s stock, writing that Meta’s guidance and quarterly results are “thesis changing” and are “likely to weigh on the shares for some period…until the market can feel confident in execution and return on invested capital from these outsized investments,” analysts wrote in a note published Thursday.