Big Tech earnings forecast to slow in Q3 as ad sales fall further

The biggest US tech companies are set to face unfamiliar scrutiny on their costs when they report their latest earnings this week, as a sharp revenue slowdown brings an end to the pandemic-fuelled surge in digital activity of the past two years.

Growth in the combined revenues of the five biggest US tech companies — Alphabet, Amazon, Apple, Meta and Microsoft — is expected to have slowed to just under 10 per cent in the third quarter, according to analysts’ estimates. That compares to a 29 per cent jump for all of last year, when their combined sales soared to $1.4tn.

The earnings are being closely watched as a barometer of the wider consumer economy, with online spending and digital advertising expected to continue a sharp deceleration already seen in the first half of this year.

In one potential sign of a wider pullback in spending, shares in Snap tumbled by 28 per cent on Friday after the social media company reported pressure on its advertising income. Most analysts blamed the disappointment on Snap’s own problems. But company executives also pointed to a growing caution among brand advertisers, who they said had been constantly fine-tuning their digital ad spending in response to signs of economic slowdown.

Meta, formerly known as Facebook, could add to the concerns if, as expected, it reports that its revenue slipped 5 per cent in the third quarter. They dipped 1 cent in the preceding three months, the company’s first-ever revenue decline. Growth has slammed to a halt after surging 37 per cent in 2021, though like Snap the company has been hit heavily by privacy changes at Apple that have reduced how precisely it can target its advertising.

Procter & Gamble, one of the biggest marketers, said last week that it had cut its advertising spending in response to falling volumes, even as higher prices continue to lift its revenues. However, lower ad budgets at companies like P&G are still outweighed by the number of companies increasing their spending to take advantage of continued demand from consumers, said Brian Wieser, president of business intelligence at GroupM, part of WPP.

Along with a potential consumer slowdown, Big Tech’s latest results are set to be weighed down by the soaring US dollar and comparisons with very strong results recorded a year ago. Growth at Google parent Alphabet is expected to slow to 10 per cent from 41 per cent in all of 2021, though the search business has held up better than other forms of advertising in previous economic slowdowns. Amazon, where growth slumped to 7 per cent in the first half of the year from 22 per cent in all of 2021, is expected to rebound slightly thanks to the addition of a second Prime Day in the third quarter to boost sales.

The end of Big Tech’s period of headlong growth has already forced some of the companies to act on expenses and heightened Wall Street’s attention to the sector’s profit margins. Meta said last month it was imposing a hiring freeze for “most jobs across the company”, while Google has closed some underperforming units and slowed hiring since CEO Sundar Pichai called on staff in July to show “greater urgency, sharper focus, and more hunger”.

Cost-cutting at Google is likely to lag its revenue slowdown, pushing the operating profit margin reported by parent Alphabet down by more than 4 per cent in the latest quarter, analysts at BofA Securities wrote in a note last week.