Tech earnings this week were a bit … gloomy

We’ve seen layoffs, hiring freezes, and now some cold, hard numbers that show the tide is turning in the tech industry.

After booming during the pandemic, big companies like Microsoft, Alphabet and Meta may now be feeling the pinch of a tighter economy. At least that’s the signal from a series of disappointing earnings reports this week.

Apple was the exception, boasting record revenues, but sales of its new iPhone 14 were slower than expected. Daniel Newman, principal analyst at Futurum Research, said companies that rely on advertising are taking the biggest hit. Marketplace’s Meghan McCarty Carino spoke with Newman about it. The following is an edited transcript of their conversation,

Daniel Newman: What we’re starting to see happen is companies that have really high exposure to consumers are seeing a more significant fall in revenue. Meta had multiple quarters now of negative revenue growth. I mean, who would have ever thought that? But we are heading into a period of time where some of the macro in the indicators from the [Federal Reserve] or from inflation, or even the [gross domestic product] number that hit this week that, “Oh, things are still really good.” But a lot of those numbers are lagging. And I think we’re starting to see consumers getting worried. With seven-plus percent interest rates on mortgages, people are thinking more about how they’re going to spend their money, because that’s going to affect cars and credit cards and everything else they do.

Meghan McCarty Carino: So what are the mechanisms by which rising interest rates are affecting these companies?

Newman: Well, each company can be affected somewhat differently. But then as you kind of go up the stack, higher interest rates impact things like commercial credit. So if you want to acquire companies, if you want to buy equipment, that’s getting hard to do. And if you can do it, you got to spend more on it. So you’re spending more of your operating dollars on interest. The stronger dollar makes tech companies worth less, and that tends to be a trend line. And we’re seeing that right now.

McCarty Carino: And what about the role of advertising for a lot of these companies, particularly social media platforms?

Newman: Companies advertise when they feel that they can get a return. So there’s a couple of different ways you advertise for the brand and visibility of a company. But a lot of these businesses that advertise on Facebook and Snap, and Alphabet, Google, YouTube and these platforms, it’s a conversion. One of the best things with the advent of social media and online advertising is the ability to get attribution, to understand how you actually got a sale and whether or not that click drove revenue and who the consumer is. And so we, of course, know Apple’s making it harder to know who the consumer is and getting to that right consumer. We know that companies like Meta, there’s an elasticity of how much they can charge. And if companies are feeling that they’re getting a lower return, they’re going to want to pay less for those advertisings and those clicks. And because it is typically performance-based marketing, they actually look and say, “Well, we’re spending more, and we’re getting less deals. And so maybe we shouldn’t spend so much on this platform.” And so I think there’s definitely a hierarchy of the most valuable platforms to the least valuable platforms. And companies are pulling back on all their advertising, as we saw with Alphabet’s results. And if you’re lower down the totem pole, if you’re Snap or Pinterest, and now if you’re even Meta, you are starting to see dollars pulled away from you. And that’s because companies are spending less on advertising, overall. And then they’re spending even less with those companies below the line.

McCarty Carino: What does it mean in kind of the big picture to see the tech industry taking a little bit of a downturn?

Newman: I think it’s cycles. So you got to see these ebbs and flows. And right now, it seems like more ebbing than flowing is going on. But again, these companies had huge rises, huge growth, a user adoption, scale and expansion, and this pullback is probably somewhat healthy. Although it’s starting to drag on where these bigger recessionary concerns are becoming evident.

McCarty Carino: So how would you expect companies to adjust to this kind of changing landscape?

Newman: I think companies have to look at transformation projects that can help them to weather the temporary storm, but not lose track of their innovation agenda. You still need to drive culture, you still need to create a place where people are excited to work. So you got to find the balance on those two things. But I think implementing automation, looking at things like analytics tools, cloud computing and things that can be consumed. You know, a lot of the best companies actually IPO or come out or go public or build a lot of their long-term success in tougher markets.

Related links: More insight from Meghan McCarty Carino

After Meta’s unhappy earnings report, a Washington state judge Thursday fined the company $25 million, according the Associated Press, for “repeatedly and intentionally violating” state campaign finance disclosure laws. AP reports it’s likely the biggest campaign finance penalty in U.S. history.

But in the grand scheme of things, $25 million doesn’t really sound like that much. I mean, Bloomberg news reported Meta’s CEO Mark Zuckerberg lost more than 400 times that amount just this week, about $11 billion in personal wealth.

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