Earnings Season Winners And Losers in Cloud Tech

It wasn’t as bad as everybody thought. After the worst stock market in 40 years in the first half of 2022, technology stocks – which bore the brunt of the selloff – have roared back on earnings reports that just haven’t been that bad.

With interest rates spiking, supply-chain woes continuing, and the “R” word bandied about (recession), there have been a host of issues for the market to navigate, generating volatility. But the core issue has been the reduction of the premium valuations assigned to technology stocks as interest rates spike.

But as the technology earnings season wraps up, the tech markets have stabilized as earnings have for the most part been more sanguine than investors expected.

Winners: Cloud Leaders, Networking, Cybersecurity

Cloud still represents one of the biggest long-term opportunities in tech investing, with mass, long-term digitalization efforts underway. The pillars of the cloud technology markets over the past decade have been the cloud giants, including Amazon, Google, and Microsoft.

Fears of a recession in tech land seem overblown. 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 40% 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.

Networking giant Cisco allayed many investor fears, with shares on August 18th rallying on the news that revenue was flat y/y at $13 billion, with net income of $2.8 billion, a decline of $200 million from a year ago. Investors had apparently expected worse after Cisco revised down its expectations in May during its third fiscal quarter earnings. Cisco shares are up 12% from the market bottom in June, though Cisco shares are still down about 14% for the year.

One remaining concern for Cisco investors could be continued erosion in market share, as smaller players such as Arista Networks and Juniper Networks appear to be picking up momentum.

Arista reported that Q2 revenue of billion, a 47% y/y increase. Arista has been gaining traction in large cloud data centers but is also now chipping away at Cisco’s core enterprise accounts, as the market-share data below shows.

Juniper Networks shares have shown strength 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

Palo Alto Networks, which competes with Cisco in the cybersecurity market, 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 $420 to $640.

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

Losers: Oracle Layoffs and Fortinet Shares Down

So who didn’t fare as well? Let’s take a look at some of the technology companies that haven’t demonstrated the same quality and strength as some of the cloud leaders.

Oracle is still enormously profitable but does not appear to be keeping up with the growth of the cloud leaders and has generated some bad news with mass layoffs.

In June, Oracle reported fiscal Q4 revenue of $12 billion, up about 6% y/y. Cloud revenue was $2.9 billion, up 19% y/y. But the big news has come with layoffs, which many employees report has shaken the morale quite a bit. Major news outlets have reported layoffs in the hundreds, although others such as Forbes have pegged the layoffs as high as 3,000. Oracle itself is not revealing the size of the layoffs. In June, Oracle reported $191 million in restructuring costs, indicating it is realigning its workforce significantly.

More bad news came from NVIDIA which had to revise down expectations for the year as its growth has slowed dramatically. 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 hyperscale cloud customers.

Supply Chain Issues Persist

Supply chain is a theme that has continued to pop up during tech earnings season, as technology companies struggle with the post-pandemic supply chain.

According to recent research from electronics supplier Avnet Silica issued in May:

· For the first time in recent years, 100% of earnings calls discussed supply chain concerns in 12 different sectors.

· Of the 20 sectors most focused on supply chain issues, more than half are reliant on electronic components for manufacturing, and more than a quarter are involved in the supply of food and groceries.

· Inflation, supply chain and talent top the list of growing concerns for company executives and their investors, with inflation being the fastest growing topic on earnings call agendas this year.

· Supply-chain concerns continue to grow, with the topic claiming airtime in 60% of earnings calls across all industries in 2022 compared with 47% in 2021.

This earnings season has demonstrated that supply-chain issues are likely to be a long-term struggle, as China’s economy has been uneven in the face of pandemic-related shutdowns and political tensions have also been rising with the West.

“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 Cisco CEO Chuck Robbins on the corporate earnings conference call.

This earnings season is still wrapping up, so the supply-chain sentiment data is not yet available – but it still remains one of the most talked about issues in the market.