Tech Megacaps See Red as Earnings Disappoint

Three of the four largest U.S. companies by market value posted earnings declines this week and said they plan to cut costs in the face of persistent economic headwinds. Investors rewarded just one—Apple (AAPL).

Amazon (AMZN) and Alphabet (GOOG, GOOGL) shares fell 8.3% and 3.3% Friday, narrowing the Nasdaq's 2023 gain to 15%. Apple gained 2.4% as the world's most valuable company said it resolved supply disruptions that have held back iPhone sales.

Apple posted earnings of $1.88 per share for its quarter through December, down 11% year-over-year and six cents below analyst estimates. Revenue fell 5.5% and iPhone sales declined 8.2% amid a supply shortfall, after workers at the Chinese factory run by contractor Foxconn staged walkouts and protests for higher wages and an end to COVID-19 lockdowns.

It was the first time Apple missed consensus earnings estimates in seven years, and its first revenue drop since 2019. Wearables and accessories sales were down 8% while Mac revenue fell 29%, hurt most by what Apple CEO Tim Cook called "a challenging macroeconomic environment."

While the company expects stronger iPhone numbers relative to year-earlier sales in its March quarter, it said Mac and iPad revenues would be down at least 10% year-over-year. The PC industry "is very challenged," Cook said on the earnings conference call. "I think it will be a little rough in the short term."

Apple shares fell in after-hours trading Thursday, only to rebound as the company said its gross margin would expand during the current quarter, bolstering earnings as it benefits from lower component costs. Apple is also counting on resilient service revenue—which grew modestly in the December quarter, topping expectations—after adding 150 million active phones during the quarter to bring its installed base to 2 billion.

Online search and advertising giant Alphabet also posted disappointing quarterly results. Its earnings of $1.05 per share were 13 cents shy of the average Street estimate. "The macroeconomic climate has become more challenging," Alphabet CEO Sundar Pichai said, after Google's advertising revenue fell almost 4% year-over year.

The low single-digit growth after adjusting for currency effects "is kind of almost back to '09 recession levels. Just think about that," Bank of America analyst Justin Post said on the conference call. Alphabet CFO Ruth Porat declined to speculate on when the slowdown might end, citing a "challenging" outlook.

"We have a longer-term effort underway to re-engineer our cost base," Porat said, though she cautioned the results will be more apparent in 2024 than this year.

Alphabet said it plans to record a charge of $1.9 billion to $2.3 billion in the current quarter for severance costs related to its recent announcement of 12,000 layoffs. The company plans to write off another $500 million to reduce its office footprint.

E-commerce and cloud computing giant Amazon, by contrast, posted net sales and operating income ahead of estimates for the December quarter, even as it recorded its first annual loss since 2014. Amazon then spooked investors with the news that revenue at Amazon Web Services, its cloud computing service, was up about 15% year-over-year in January, after slowing to year-over-year growth of 20% in the December quarter.

"What we're seeing is just an interest and a priority by our customers to get their spend down as they enter an economic downturn, " Amazon CFO Brian Olsavsky said on a conference call with analysts. "We're doing the same thing at Amazon, questioning our infrastructure expenses as well as everything else." Amazon expects the cloud spending pullback to last "at least the next couple of quarters," the CFO said.

The company recently announced plans to lay off 18,000 employees, after dramatically expanding its workforce in 2021.