Unimpressive From The Behemoth
The most talked about topic at the forum of the elites in Davos, Switzerland was the souring economic environment globally.
That’s starting to look more real by the day as companies realize aggressive revenue estimates need to be flushed down the toilet.
As funny as it sounds, the January gangbuster rally could have been just a delayed Santa Claus Rally that got pushed back one month.
Now we are entering earnings season, and that means some companies won’t be able to spin numbers in the right way.
That bodes ill for many tech companies as, beneath the surface, the engine humming along that is the tech sector is starting to flash a few red lights.
Tech shares sold off sharply this morning which is quite unusual when the U.S. 10-year treasury barely moves.
Why did it open up poorly?
Microsoft offered us unimpressive guidance that was $2 billion less than the consensus.
Clearly, Microsoft is trying to lower the bar earlier than the other tech companies, boding ill for sector-wide guidance.
That’s highly unusual for the tech bellwether who has the habit of beating and raising forecasts almost systemically.
I can’t imagine tech firms in the ecommerce space like Amazon or Etsy offering better than expected guidance either for the annual year or the quarter’s ahead.
Microsoft was also one of those tech firms that took a machete to staff and sliced off a big chunk of them.
I would have liked to see Microsoft fire more than 10,000 workers and felt they could have easily handled a 50,000 reduction.
The $1.2 billion charge resulting from these layoffs is just a drop in the bucket for MSFT.
CEO Satya Nadella used the words "caution" at least six times on the one-hour call on Tuesday.
Nadella also let investors know that Microsoft Azure, the cloud product, is slowing down to 31% and although still healthy, growth products aren’t growth products anymore when they dip into the 20% range.
The tech business model and the sector as a whole is getting a little stale.
They aren’t the shining stars of the equity market anymore as costs skyrockets and revenue decelerate. That designation is now reserved for energy and precious metals.
Don’t wait for tech to pull a rabbit out of the hat in the short run.
The bad news is that it doesn’t seem that revenue weakness will only be confined to Microsoft.
A large swath of the tech sector could be painted red when it’s all said and done, which is why equity holders are betting on US Central Bank head Jerome Powell saving the day.
The silver liner on offer from Nadella was telling us how MSFT is betting the ranch on artificial intelligence particularly ChatGPT.
Artificial Intelligence inching closer to material revenue contribution is highly positive, but in the here and now, it’s hard to see where the incremental great idea comes from.
Nadella also told us that enterprise software isn’t doing as great because companies are being thriftier in what software they use.
Firms are cutting software and reducing their software footprint where they can get away with it.
Sales of Windows Licenses dropped 39% year over year highlighting the issue of companies attempting to universally cut costs.
When the overall economic mindset originates from a thrifty-based beginning, it doesn’t favor technology stocks.
Tech usually basks in the glory of the excesses, which is why they overshoot to the upside.
Hence, Chairman Powell is now priced in to singlehandedly rescue tech shares as many investors wait for his pivot back to zero interest rates yet again just like the 2008 Great Financial Crisis on repeat.
