Please assign a menu to the primary menu location under menu

Entrepreneur

Corporate Hope Cushions the Tech Sector, For Now


Comment

The latest raft of technology earnings is starting to show a clear divide between areas that may continue to grow and those that will most certainly suffer at the hands of a global economic slowdown. Whether the more resilient sectors succumb, or conversely, drive a rebound in the parts that slumped, will be a key issue to watch over coming months. 

Most major technology hardware names have already reported June quarter numbers and provided their assessment for the second half of this year. These include Apple Inc., Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co. and Intel Corp.

Generally speaking, we can conclude that consumer spending and outlays on discretionary items — those that are short-term or non-essential — is declining sharply. Yet corporate demand is robust, especially for infrastructure and equipment such as data centers, communications networks and industrial applications. 

Escalating inflation is a major driver of uncertainty. US consumer prices climbed 9.1% in June, the highest level in more than 40 years, and central banks across the globe are raising interest rates to tackle the problem. This higher cost of money is hurting the economy, pushing the US into two consecutive quarters of declining GDP (a so-called technical recession). Meanwhile, China — the world’s second-largest economy — is grappling with Covid-19 lockdowns and a worsening property crisis.

TSMC was one of the first to hand in its financial report card and predict the future. If one was to look only at this company, and not too deeply, you’d think all was fine in the world. Earnings beat estimates and its outlook far exceeded what analysts had expected. But amid the fine print and pie charts, was some clarity about what’s hot and what’s not.

Sales from chips used in smartphones climbed a mere 3% from the prior quarter, no longer accounting for the largest slice of revenue. High-performance computing on the other hand, which comprises processors used in artificial intelligence, data centers and 5G mobile networks, expanded 13%. Revenue in this division grew around 50% from a year prior, according to Bloomberg Opinion calculations.

Numbers from Intel and Samsung tell a similar story.

As the world’s biggest maker of computer and server central-processing units (CPUs), Intel is uniquely reliant on a small slice of the tech industry. It doesn’t look pretty. Revenue at its client computing group, which sells chips used in desktop and laptop PCs, dropped 25% from a year prior, with operating margin in that division shrinking by 65%. Its data center division was down 16%, partly because customers who make data-center servers are trying to cut inventory, and a larger proportion of what it did sell was lower-priced chips. Tellingly, its network and edge division (wired and wireless communications) actually climbed. What’s most chilling is that Intel slashed its full year revenue outlook by 15%.

Over at Samsung, lower consumer demand is hurting memory chip sales, the bread and butter of the South Korean giant’s earnings, because people just aren’t buying as many personal computers. Smartphone sales were also weak, it said. Yet demand for memory used in enterprise applications such as servers remains solid, as does that for its 5G networking infrastructure business. The company also offered a simple warning — the problems in the PC sector may spread to the enterprise business. Lattice Semiconductor Corp., a smaller designer of specialist chips, on Monday showed a similar trend. Its consumer division dropped, while its industrial, automotive, and communications areas climbed. 

Apple is a curious case. IPhone revenue climbed a modest 2.8% from a year ago. Yet its services business, which includes Music, iCloud and the App Store, jumped 12%. Meanwhile, Mac sales dropped 10%. We tend to think of smartphones as a discretionary consumer purchase, and Apple’s pricier computers as being for corporate and niche users like designers and software developers. These numbers may instead indicate that a new iPhone is a must-have, especially if its time to upgrade, whereas buying a fancy new laptop or high-powered desktop is something that can wait a little longer. 

There’s plenty to watch through to the end of this year. Inflation is still not yet under control, Russia’s invasion of Ukraine continues (with an impact on energy prices), sporadic lockdowns are still happening in China, and there’s brewing tension in the Taiwan Strait. If corporate demand continues, notably long-term investment in communications and data center infrastructure, the tech sector may get through relatively unscathed. But if economic uncertainty drags on too long, even those areas that once looked robust will likely falter.

More From Bloomberg Opinion:

• TSMC Has a $40 Billion Vaccine Against Inflation: Tim Culpan

• What’s More Important? Covid Zero or Three Red Lines: Shuli Ren

• Hiking Early Won’t Mean Catching a Break Later: Daniel Moss 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News.

More stories like this are available on bloomberg.com/opinion



READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.