Red flags waving for tech stocks as AI bounce fades, China fears escalate
by As technology companies look forward to big opportunities in artificial intelligence, this latest earnings season seemed to reveal some cracks in their present-day armor.
Technology stocks have pulled back in August after the sector racked up seven months in a row of gains to start the year. Recent weakness comes amid renewed skittishness about interest rates, which is pressuring more expensive, rate-sensitive names, but it’s also worth paying attention to what companies have said about the health of their industries lately.
Namely, executives used their recent earnings calls to highlight a number of challenges, including a slower-than-expected recovery in China, sluggish consumer-electronics demand and more cautious approaches from some enterprise customers.
“We’ve seen weakness across China and other emerging markets,” Qualcomm Inc.
QCOM,
Chief Financial Officer Akash Palkhiwala said on the chip company’s earnings call in early August, according to a transcript provided by AlphaSense/Sentieo.
The company expects its handset units will be down at least by a high single-digit rate this calendar year, “reflecting the macro environment and a slower recovery in China,” Palkhiwala noted.
Microchip Technology Inc.
MCHP,
which makes embedded chips for areas ranging from automotive to consumer to aerospace applications, also called out challenges in China.
When asked whether the company’s issues there partly stemmed from heightened local competition, Chief Executive Ganesh Moorthy said they were rather a function of weak consumption in the country.
“There is a lot of uncertainty in China with respect to…the amount of debt people are carrying [and] what kind of stimulus is going to take place,” he said. “And I think there is consumption that is waiting to happen and I hope it will open up at some point in time, but at the moment, I think things are uncertain enough that consumption is being held down.”
Chip giant Intel Corp.
INTC,
called out sluggish conditions in China as well. The market “hasn’t come back as strongly as people would have expected overall,” Chief Executive Pat Gelsinger said on the earnings call.
Outside of the chip sector, Dupont De Nemours Inc.
DD,
which makes materials and component solutions for various areas of the electronics market including television monitors and mobile devices, highlighted weakness in consumer electronics.
China “does concern us,” Matt Stucky, senior portfolio manager for equities at Northwestern Mutual Wealth Management, told MarketWatch. While the economy showed a strong recovery when China initially reopened, it “looks like destined to fall into deflation mode,” he said, which is “not encouraging” for companies that do a lot of business there.
Chief Financial Officer Lori Koch highlighted “ongoing consumer electronics demand headwinds, notably in China” as one reason why the company trimmed its full-year earnings outlook.
Meanwhile, 3M Co.
MMM,
Chief Executive Michael Roman said his company, which makes films and adhesives for the electronics market, “saw a soft first half” in “all consumer electronics categories” from smartphones and TVs to notebooks and tablets.
Technology juggernaut Apple Inc.
AAPL,
saw a year-over-year decline in revenue from the Americas, though the company posted a slight sequential acceleration in the region. “It’s a challenging smartphone market in the U.S. currently,” Chief Executive Tim Cook said.
Counterpoint Research analysts recently projected that overall global smartphone shipments could reach a decade low this year.
As tech companies see “a significant slowdown in their own rapid rates of growth,” they’re showing more caution around advertising spending, according to Mark Read, the chief executive of ad-agency WPP PLC
WPP,
“We did flag earlier this year that we’ve seen some slowdown in spending from technology clients on marketing, but this accelerated in the second quarter,” he said.
See also: Tech stocks look strong, but here’s a sign the sector is actually under a lot of stress
Companies highlighted challenges on the enterprise side as well.
Keith Jensen, the chief financial officer of cybersecurity company Fortinet Inc.
FTNT,
said the company suffered from an “elevated level of enterprise deals” that were got out into future quarters.
Shares of Fortinet got crunched immediately following earnings as the company came up shy with both its latest billings and its outlook on the metric.
“We believe our billings performance reflects large enterprise concerns with the macro environment, in addition to some inventory digestion after two years of elevated 30-plus-percent product billing growth during the supply-chain shortage,” Chief Executive Ken Xie said.
The topic of “digestion” came up on other calls as well.
Rami Rahim, who heads networking company Juniper Networks Inc.
JNPR,
shared that in the cloud, he was “seeing more customers digesting prior purchases and pushing projects to future periods.”
“While these dynamics are likely to pressure our cloud business for the next few quarters, we remain optimistic regarding our longer-term growth prospects in the cloud,” he said, citing factors like the company’s footprint and its potential to capitalize on AI buildouts.
While many companies see exciting potential in AI, they also suggested they wouldn’t necessarily see great financial benefits right away. But Wall Street had been a bit worried that customers would pull back on more generalized tech spending while allocating dollars to AI, and at least one executive acknowledged that trend was occurring.
There’s “near-term wallet share focus on AI accelerators rather than general purpose compute in the cloud,” Intel’s Gelsinger said, one reason why he expects “digestion” of server CPU inventory to continue into the second half of the year.
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