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Google/Microsoft/Meta: Soft Results Due to Tighter Monetary Policy & Post-Pandemic Normalization

Thomas Paulson
Oct 28, 2022
Google/Microsoft/Meta: Soft Results Due to Tighter Monetary Policy & Post-Pandemic Normalization

  • Google and Microsoft's softer-than-expected 3Q22 results and tepid 4Q22 outlook reflected several factors: (1) the broadening and deepening effects of the Federal Reserve’s monetary tightening; (2) the ongoing post-pandemic normalization; and (3) the second-order effects from the Ukrainian War and China’s economic/health policies.
  • The Fed’s monetary tightening is having three primary effects: (1) a stronger dollar which lowers the dollar value of revenue earned in overseas markets; (2) a rapidly rising cost of capital, which has disrupted start-ups and businesses that were previously reliant on essentially zero cost of capital (this has been a persistent theme of ours this year–see last week's comments on Silicon Valley Bank); and (3) the slowing of economies around the world via higher interest rates (housing, crypto, and auto loans for example).
  • Google’s ad business is levered to the pace of economic growth. Acceleration and deceleration, at a multiple, drives demand for Google’s advertising growth; as such, Google’s advertising business is expected to post only low-single-digit organic growth in 4Q22. The rising cost of capital negatively affects Google’s and Microsoft’s cloud businesses (and Amazon’s) because less business activity and revenue at these customers lowers their workload in the cloud (proportional to cloud expense/revenue) and there are fewer of new early-stage customers (then there would be if we were still in a zero cost of capital environment). Microsoft CEO Satya Nadella stated, “I want to outline the principles that are guiding us through these changing economic times…We'll prioritize helping our customers get the most value out of their digital spend so that they can do more with less.”
  • The normalization impact is the movement of the economy’s mojo from in-the-home cozy/comfy to out-of-home experiences and services. That movement has severely dented gaming, streaming, and consumer electronics, but boosted travel and on-premises food/beverage. This is a dismal outlook for e-commerce and consumer electronics this holiday season – something that we wrote about in our holiday preview. Google called out only two customer segments of strength during its 3Q22 update: retail and travel. By “retail” they mean brick & mortar retail. Segments of weakness included gaming, crypto, and mortgage, amongst others. As it relates to consumer electronics and gaming, for the company's December-end quarter, Microsoft expects Windows licensing to decline -35% YoY (lower PC units) and XBox content/services is expected to decline near -15% due to lower engagement hours.
  • Meta Platforms (formally known as Facebook) reported soft results reflecting the same factors impacting Google and Microsoft, the loss of signal for IDFA, and share loss to TikTok (all ongoing headwinds the past year, but which have deepened this past quarter). Travel and healthcare were called out as segments of strength for advertising. Segments in decline were online commerce, gaming, financial services, and CPG. Additionally, large advertisers pulled advertising the most, small/medium businesses (SMB) were more “resilient” which makes intuitive sense, because SMB don’t have products in physical stores and digital is their only route to the consumer. Lastly, it's worth highlighting that revenue is declining steeply in Europe (down $1.1B YoY), whereas it’s down half that amount in the U.S. That differential is reflective of the two region’s relative economic mojos.
  • In terms of moving communities and commerce into the metaverse (and by association, out of the physical space), that remains only real in Zuckerberg’s universe (in other words, it's not a tangible threat to physical retail). “Operating discipline” and the rising cost of capital have been big topics for the financial markets and the economy this year, and especially for Silicon Valley tech companies. Meta has been in the crosshairs of this “debate” of what is too much and what are the returns. To put Meta’s capital and research & development investment in perspective, the company is expected to spend $37B in R&D and $37B in capex in 2023. Both of those figures are larger than the combined totals of Intel, Pfizer, Northrup Grumman, Boeing, and Tesla ($35B and $38B, respectively).

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more.

He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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