Big tech still has big concerns

Amazon had a nasty stance, with March quarter sales growing 7 percent, the weakest quarterly number since 2001, e-commerce sales down 3 percent year-over-year, and free cash flow swung to negative $19 billion ( $26.7 billion) of US dollars. 26 billion US dollars for the same period last year.

Apple affected by supply chain concerns

This was all exacerbated by the weaker than expected guidance for April-June sales. Amazon stock is down 9 percent in aftermarket trading, indicating an ugly open Friday (Saturday AET) in the US.

At first, it seemed that Apple, the undisputed heavyweight not only in the tech sector, but in global markets, was assuaging investor fears. Its March quarter was surprisingly good, beating analyst expectations and setting a non-recession record. Cherry on top was a $90 billion stock buyback.

But then came the Apple earnings call, starring CEO Tim Cook and Chief Financial Officer Luca Maestri. They warned that between $4 billion and $8 billion will be hit to revenue as supply chain disruptions caused by China’s COVID-19 lockdown exacerbate existing supply problems, particularly silicon chip shortages.

Within minutes, Apple shares fell as much as 6 percent in aftermarket trade. It seems that the savior did not live up to expectations.

Now, it’s worth noting that Apple shares rebounded a bit, closing down about 2.2 percent in aftermarket trading. This seems to be a more reasonable response. Even if Apple were to hit $8 billion in shutdowns in China, it would have to be seen in the context of quarterly revenue that regularly exceeds $100 billion.

However, Apple’s concerns about the supply chain in China and consumer spending in the country add to its laundry list of concerns for the tech sector. Amazon tells the story better.

growing fears

Like most companies in the world, it is experiencing inflationary pressures, from rising energy and transportation costs to rising raw material prices and availability challenges, including computer chips vital to Amazon’s web services business.

Work was also a problem. Not only has the increased demand necessitated a hiring spree in the retail business, but the increase in stock awarding suggests that sticking to highly skilled technology and corporate employees has been a challenge.

Having doubled his fulfillment network in 24 months, Andy Gacy, CEO of Amazon, says physical space and hiring are no longer a constraint. But having rushed to add capacity to meet the extraordinary demand of the pandemic, it now appears that Amazon – and thus the US economy – may be about to see a dip in consumer spending, at least on physical goods.

Amazon’s e-commerce sales couldn’t even come close to keeping pace with inflation in the March quarter and losing money in this division is worrisome given the potential for the US economy to slow further, possibly putting a recession on the right track. .

The argument with Amazon has long been that its retail business would eventually enjoy bumper returns when it invested enough to hit scale. Sure, that was reached after the biggest increase in demand in generations, but the big returns are still a long way off, and Amazon’s free cash flow has reversed.

Kogan warehouses are full

Amazon’s problems were small on Friday at ASX-listed online retailer Kogan, which said its total sales in the March quarter fell 3.8 percent and its gross profit fell 11.2 percent.

The stock, which is down 64 percent in the past 12 months, collapsed another 10 percent on Friday.

For the second year in a row, Kogan appears to have fallen into the trap of too many stocks just as consumer demand has waned. But this time, CEO Ruslan Kogan said the group will readjust operating costs next year in order to “restore historical margins,” signaling acceptance that the pandemic’s impulse is fading.

Of course, the growing supply and demand challenges now facing tech stocks are exacerbated by pressure on valuations from higher interest rates.

As the US Federal Reserve prepares to meet next week, higher inflation means a half-percentage point increase is likely; Goldman Sachs now also expects another half-point rise in June, followed by quarter-point increases at each meeting for the rest of the year.

The 18 per cent drop in the Nasdaq from its January high suggests that higher rates are priced in somewhat. But does the market fully appreciate how tech stocks will be affected by a combination of high inflation, high rates, supply issues and slowing demand?

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