Is there a “crisis” for American tech giants? Maybe not

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Text / Pei Pei

Source/Internet Phantom Thieves (ID: TMTphantom)

American technology companies (including but not limited to Internet companies) represented by the five giants Apple, Google, Amazon, Meta, and Microsoft have all announced their third-quarter 2022 financial reports. On the Chinese Internet, you can see a lot of remarks about “the US technology industry is dying”; today I also saw a hot search on “Zuckerberg admits Meta’s misjudgment and forced layoffs” on Weibo. Not long ago, “Apple’s market value evaporated by 1 trillion yuan in one day” was also on the hot search, although I don’t know why it is necessary to calculate the market value of a US-listed company in RMB (because it looks like a big loss?).

At present, the standard statement of domestic analysts and the media is that due to a series of negative factors such as the sluggish US economy, severe inflation, and the Fed raising interest rates, the life of US technology giants is no better than that of their Chinese counterparts; and they will be in the next few quarters. It will get worse and worse. Some people will also expound some more in-depth “points”, such as “the Internet is over, and it is the same in the United States”, and “the US economy will pay the price of the past few years of deviating from reality” and so on.

I don’t know much about macroeconomics, but I can read earnings reports in English and have tracked quarterly reports and conference calls from U.S. tech giants every quarter in the past. After carefully reading the financial reports of the five major technology giants in the US stock market, I feel that the above statement of the Chinese Internet seems to be unfair. What I see actually is:

  1. Revenue growth for U.S. tech giants has indeed slowed, but when currency effects are factored in, the picture isn’t as bad as it seems.

  2. The main reason for the decline in net profit of US technology giants is the increase in costs caused by personnel expansion and salary increases, and this trend will continue for many quarters.

  3. Substantial resources are being continuously invested in research and development, including cloud computing, artificial intelligence, the metaverse, and more, which will ensure America’s technological competitiveness for many years to come.

  4. If anyone is in crisis, it’s Meta, which has sucked for years, will be worse, and is about to be kicked out of the “tech giant.”

Say the first one. Operating income growth in the U.S. tech giants has generally slowed sharply in the most recent quarter, but we have to take into account the impact of the rising dollar: these companies report in dollars, so their non-dollar revenue from overseas depreciates; in theory In other words, the higher the proportion of overseas income, the greater the adverse impact of the appreciation of the US dollar.

Fortunately, all major U.S. tech companies report on “the impact of currency factors on operating income.” It can be seen that under a stable exchange rate, their income growth rate will increase by 4-6 percentage points. Under this caliber, the four giants except Meta have achieved double-digit revenue growth – in the case of economic recession, this performance is not bad at all, and it is also better than most Chinese Internet companies ( and so-called “hard tech” companies).

Some people will point out that since exchange rate changes have driven down overseas income, haven’t they also reduced overseas costs? True, but the cost centers of American tech giants are still domestic. For example, Microsoft generates 50% of its revenue overseas, yet has about two-thirds of its employees and offices located in the continental United States; therefore, the impact of exchange rate changes on its net profit is even greater than the impact on revenue.

We can see that in the third quarter just past, even taking into account the impact of exchange rates, only Apple has achieved net profit growth among the US technology giants; Google and Meta have experienced a particularly severe decline in profits. The reason for the decline in profits is very simple, that is, the growth rate of revenue is not as fast as the growth rate of costs. For technology companies, the biggest cost center is personnel expenses, and the growth of personnel expenses often has strong inertia and lag.

From the second half of 2020 to the first half of 2022, it can be said that the entire US technology industry is booming and the demand for mid-to-high-end labor is strong. Almost all U.S. publicly traded Internet and software companies have at least doubled their headcount in the past two years. Entering 2022, due to the economic downturn, recruitment in the technology industry has tightened, but the Big Five have all achieved year-on-year headcount growth, with Google, Microsoft and Meta having even more than 20% headcount growth. Most of the new manpower is technical developers (especially code farmers), and their salaries are also rising – for this, Chinese compatriots in Silicon Valley should have a deep understanding.

The result is that all U.S. tech giants have seen their costs grow faster than their revenues, and their R&D expenses have grown much faster than their overall costs. In this regard, Meta is the most exaggerated, with R&D expenses growing 49 percentage points faster than revenue; Google 28 percentage points faster; Amazon 15 percentage points faster. In this case, their operating profit and net profit certainly won’t look too good.

At this stage, the R&D investment of American technology giants is in many directions, but they mainly focus on the following directions:

  1. Cloud computing is a battleground for Amazon, Microsoft, and Google. Azure has become Microsoft’s biggest growth engine, AWS is both Amazon’s growth engine and cash cow, and Google Cloud has managed to shrink its loss rate significantly. In an economic downturn, corporate customers will be more inclined to rely on cloud computing to cut costs and reduce IT infrastructure investment. This is where the opportunity for tech giants lies – so they will continue to spend money on both infrastructure and R&D.

  2. Artificial intelligence and machine learning, they are no longer illusory “hard technology” concepts, but have a real impact on the income of Internet giants. For example, Google’s advertising business momentum is significantly better than Meta, largely because the former’s AI algorithm is more efficient; Apple’s smart wearable device upgrade depends on the in-depth application of AI in the field of health; cloud computing, enterprise application solutions The competition is also evolving into the competition of AI technology. No matter how the economic situation changes, it may be difficult for those skilled in the above fields to lose their jobs.

  3. VR/AR, or the “metaverse,” has been a R&D focus for Meta for the past few years and has recently become Apple’s R&D focus. Apple’s release of MR glasses in the next year is a high probability event, which may be the most important new product line launched by Cook since he took over as CEO. As for Meta, although investors have been complaining that its VR hardware business is losing money, Zuckerberg is still unwilling to compromise and insists on betting his future on the “metaverse.”

  4. Games, movies and other entertainment content. Microsoft’s gaming business has experienced sluggish growth for several consecutive quarters, so in addition to the finalized acquisition of Activision Blizzard, it will further increase its investment in self-developed games and cloud games. Amazon has achieved phased results in the film and television business, but the game business has only achieved a small foothold and will definitely continue to make efforts. What is more worthy of attention is Apple, which has been working hard to expand its service business and has made some progress in self-produced film and television content; so will the next step be self-developed games?

  5. Other basic R&D projects, such as Apple and Amazon’s progress in chips in recent years, are obvious to all. Google has invested heavily in autonomous driving and medical care. Amazon is also developing logistics robots and drones, and so on. Some of these research and development are closely related to the main business, and some are not. Because U.S. technology giants generally have a wealth of wealth and can afford R&D personnel, these basic R&D projects will not cause much financial drag.

Right now, the big question is: Will U.S. tech giants make massive layoffs after their frenzied expansion over the past two years? The layoff plan just announced by Meta, as well as the layoffs after Twitter was acquired by Musk, seems to be the best argument for pessimists, and it has also been repeatedly put on hot searches by domestic social media. However, judging from the most recent quarterly earnings call, other than Meta, no other U.S. tech giant has structural layoff plans.

According to the words of Google CEO, Google’s recruitment will definitely “slow down” in the fourth quarter of this year, and it will take some time to digest the results of the large-scale campus autumn recruitment in 2021; but “slow down recruitment” only means slower personnel growth, rather than downsizing. The CEO of Microsoft made a similar statement, emphasizing that it will continue to recruit in high-growth businesses such as Azure; in addition, when the acquisition of Activision Blizzard is completed, Microsoft will add about 10,000 employees. As for Apple, its revenue and profits haven’t declined, its overall financial performance is healthy, and there’s no need for layoffs, and analysts didn’t ask that question on the earnings call.

By comparison, Amazon is an outlier because it has so many employees — more than 1.5 million full-time and part-time workers combined, mostly in the warehousing and distribution sector, which fluctuate wildly with the seasons. However, if you only consider white-collar employees (technical R&D, products, operations), the overall trend is definitely up. AWS saw a 57% increase in orders last quarter, twice the rate of revenue growth, meaning engineers have more work to do. The current Amazon CEO is the founder of AWS. He will never sit back and watch Microsoft Azure come to the fore, and will definitely carry the arms race to the end.

As for the unfortunate Meta, I don’t need to go into details. Due to Zuckerberg’s incompetence, the company has not benefited much from the peak of the industry in 2020-21. Its advertising business has been completely defeated, and the “Metaverse” business has lost only underpants, and its non-advertising Internet business has almost no commercial value. As we all know, Netflix has been kicked out of the ranks of “Internet giants” after being left behind for many years, and it seems that Meta will be kicked out next. As for whether there will be a company to make up for it and who will make it up, it is not obvious now.

In view of the general lack of willingness to lay off large-scale layoffs by American technology giants (note: only Meta is excluded), and the trend of salary increases for computer technicians in the United States has not ended (the more important positions are, the more salaries are still being raised), so these companies next There will also be huge cost pressures. Wall Street is also aware of this, and the most-asked question this quarter is: Are you going to expand your workforce further? How fast will the expansion be? How to balance long-term development and short-term interests? To put it bluntly, I want them to “spend their money more efficiently and responsibly”, don’t be like Zuckerberg who loses $5 billion a year on a meaningless VR headset and thinks he has mastered the Internet. next entry.

Of course, CEOs like Zuckerberg who are addicted to vegetables are a minority in the U.S. Internet industry. Therefore, the predicament that Meta faces is not at all representative of the American Internet giant. In the past two years, we can see a clear trend: the epidemic has intensified the “online” trend of European and American consumers and the “digital” trend of enterprises, which has led to the popularity of the game business, the increase of e-commerce penetration, and artificial intelligence. The rapid expansion of application scope, cloud computing and SaaS ushered in another spring. The economic cycle can only delay this trend to a certain extent, but it is impossible to reverse it.

When the pendulum of the economic cycle returns to the upward trend, the US Internet giants with clear strategies, strict personnel, and unabated basic research and development will further consolidate their competitive advantages and deliver better financial results. It is conceivable that these news will not appear frequently on Chinese Weibo, Xiaohongshu and Zhihu hot searches (if there are still hot searches at that time). This once again tells us the importance of learning English well and reading the original financial statements. This also tells us that if your relatives and friends have children who are going to college this year, it is still a very reasonable choice for him to learn computer science. Even if he does not apply for computer science, he should learn some Python in his spare time.

Because the future of mankind is still the Internet, not some other inexplicable concept. The transformation of human society by the Internet has just begun. Saying that the Internet is dead now is like saying that industry is dead in 1870. Maybe it will be correct a hundred years later, but it is not correct now. When you have doubts about this, just read the earnings reports of Google, Amazon, or Microsoft to clear up all your doubts and have confidence in the future of humanity.

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