Tech Markets Stabilize During Earnings Season


By: R. Scott Raynovich

As technology earnings season wraps up, it’s becoming clear that letting some of the air out of technology markets was reasonable. But tech markets have stabilized as earnings have for the most part been more sanguine than investors expected.

Let's start with how much fear was built in. The first half of 2022 was one of the worst years in the stock market going back to the 1970s, as inflation fears and federal interest rate hikes kicked in. At one point this year, the tech-heavy Nasdaq Composite was down as much as 26%, with many individual technology shares, especially those linked to cloud, down as much as 30-40%.

Technology shares have bounced back as earnings have come through without any major disasters in the cloud space, with the Wall Street Journal already declaring a new bull market. That might be a stretch with the Nasdaq still down 18% for the year, but the markets have stabilized - for now.

Big Cloud Players Still Growing Fast

The large cloud providers – such as Amazon, Google, and Microsoft – showed they are still growing and making enormous amounts of profit, even though their growth rate has slowed down.

For example:

  • Amazon grew 7% year-over-year (y/y), despite some weakness in its core consumer market. Amazon Web Services (AWS) is still growing 37% y/y.
  • Microsoft’s revenue grew 12% y/y and it reported an astonishing $16.7 billion in profit – so it’s not in danger of going out of business. Azure is also growing 36% y/y.
  • Google’s overall revenue grew 13% y/y and revenue from the Google Cloud Platform (GCP) grew 36% y/y. Net profit dropped 14% y/y, but still came in at a $16 billion.

Oracle is one of the cloud providers that doesn’t seem to be having a great time. In June it reported fiscal Q4 revenue of $12 billion, up about 6% y/y. Cloud revenue was $2.9 billion, up 19% y/y. But the the biggest news to come out of Oracle in the past month has been mass layoffs, which insiders described as “complete chaos,” according to Business Insider. Insider reported that some marketing departments had their headcount cut by more than 30%.

More recently, the ugliest earnings have come from NVIDIA, which had to revise down expectations for the year. In its earnings call yesterday, NVIDIA reported a 3% year-on-year increase in revenue in the second quarter to $6.7 billion. Most of the weakness has been in the gaming sector, which has slowed down in the post-pandemic environment and left NVIDIA with an oversupply of graphics cards.

Despite these struggles, NVIDIA's datacenter business still appears to be strong. Datacenter revenue rose 61% on an annual basis to $3.8 billion, driven by hyperscale cloud customers.

Cybersecurity Still Strong

Per the most recent trend, cybersecurity markets have been uneven but stable.

Palo Alto Networks shares skyrocketed earlier in the week, as the company announced that fiscal Q4 revenue grew 27% y/y to $1.6 billion and billings grew 44% y/y, indicating strong demand ahead. Shares shot up about 11% on the news and are now trading around $570, with a 52-week range of $420 to $640.

On the other side, Fortinet reported second-quarter earnings, revenue, and billings that beat estimates, but shares sold off on disappointment. Unlike Palo Alto, Fortinet shares are trading near their 52-week low of $48, recently changing hands at around $50.

Some key cybersecurity providers have yet to report, with Crowdstrike reporting next week and Zscaler expected to report on Sept. 8.

Supply Chain Issues Persist

Be careful about shouting "Supply Chain!" in a crowded conference room. Supply chain continues to be a story through earnings, as technology companies struggle with the post-pandemic supply chain. Shutdowns in China and rising political tensions have reduced the availability of components as tech companies rethink their supply chains and begin a process or re-shoring or moving their production.

“We are navigating our supply-chain transitions in a challenging macro environment and we will get through this,” said NVIDIA CEO, founder, and chief executive Jensen Huang on the earnings call.

Cisco CEO Chuck Robbins indicated the supply-chain situation should improve. "Overall supply constraints began to ease slightly at the back half of the fourth quarter and continuing into the start of Q1," said Robbins on the corporate earnings conference call.

Cisco reported 4Q fiscal revenue and earnings that came as a relief to investors, with shares rallying. Revenue was flat y/y at $13 billion, with net income of $2.8 billion, a decline of $200 million from a year ago. Shares are up 12% from the market bottom in June, though Cisco shares are still down about 14% for the year.

One concern for Cisco investors should be continued erosion in its market share, as smaller players such as Arista Networks and Juniper Networks appear to be growing faster.

Arista reported 2Q revenue of $1.052 billion, a 47% y/y increase. Arista has been gaining more traction in large cloud datacenters but is also now chipping away at Cisco’s core enterprise accounts.

Juniper Networks shares have also been bouncing back on the twin strengths of its broadening cybersecurity portfolio and new cloud products. Net revenues were $1.3 billion, an increase of 8% year-over-year and an increase of 9% sequentially. Non-GAAP net income was $136.4 million, a decrease of 3% year-over-year, and an increase of 34% sequentially, resulting in non-GAAP diluted net income per share of $0.42.