technology

Tech Giants’ Reports Dispel Doubts About Growth

Updated on
  • Regulatory risk, Trump clashes had cast a cloud over industry
  • Rising profits and user growth may bring wary investors back

Amazon Web Services Helps Prime 1Q Profit Growth

Big technology stocks took a beating over the past several weeks on concerns that the industry’s growth surge was under threat.

But results this week from Amazon.com Inc., Facebook Inc., Microsoft Corp. and Intel Corp. — among the most valuable companies in the world — went a long way toward proving the naysayers wrong. Solid sales and profit growth and bullish forecasts reminded the market how reliant the global economy remains on the tech sector, for everything from retail and advertising sales to software and computing power accessed via the internet, and the companies’ stocks gained as fears that had built up for weeks began to dissipate.

There were many reasons to be skittish. A looming trade dispute with China put tech companies — which depend on supplies and users from around the world — at risk. After a privacy lapse at Facebook involving political-consulting firm Cambridge Analytica, investors were beginning to rethink whether consumers would be willing to keep trading their personal data for free access to social-media platforms. Regulatory scrutiny of internet companies’ business models reached a fever pitch. Then a series of tweets from U.S. President Donald Trump singled out Amazon for making the postal service its “delivery boy.” And Alphabet Inc.’s Google added to the fears Monday with a big spike in spending.

“The regulatory concerns from the Trump Amazon rumble to the Facebook Cambridge debacle has just been a major black cloud over the tech space,” said Daniel Ives, an analyst at GBH Insights. “The earnings results were the shot in the arm the bulls needed. It’s restored confidence.”

Microsoft and Amazon soared to record highs Friday, while Intel jumped to the highest in more than 17 years.

Amazon transcended the noise around Trump’s tweets, reporting higher first-quarter profit on Thursday and forecasting more of the same in the current period. The company’s cloud-computing division and its advertising business — both more profitable than selling things online — posted brisk growth and gave investors reason to believe that profitability will keep improving.

The world’s biggest online retailer also announced a $20 price hike for U.S. Amazon Prime subscribers, who will now pay $119 a year for fast shipping as well as video and music streaming. That will provide an additional $1.5 billion a year, according to Wedbush Securities Inc. analyst Michael Pachter, to offset rising shipping costs, pay for more original programming and fend off any postal rate increases.

Facebook’s stock had tumbled 25 percent since mid-March after a data-privacy scandal stirred up a public trust crisis that started a #deleteFacebook campaign, and landed Chief Executive Officer Mark Zuckerberg at the center of a U.S. Congressional inquiry. Yet the company’s earnings report showed its business — centered on selling digital advertising on its social network — is growing steadily. Revenue jumped 49 percent for a near-record quarter, and the company added daily and monthly users. The impact from the privacy controversy isn’t visible yet, as it happened toward the end of the first quarter. Still, Wall Street celebrated, sending the shares up 9.1 percent Thursday.

“Despite remarkably negative headlines, users have not fled from online services,” said Ben Schachter, an analyst at Macquarie Securities. “If these types of headlines don’t cause mass defections, I don’t see much that will.”

Microsoft, the world’s largest software maker and the No. 2 cloud-computing company behind Amazon, topped analysts’ projections for the March quarter, and its first outlook for the fiscal year starting July 1 promised continued momentum in cloud services and productivity software. The company’s pledge to keep spending heavily to build data centers that run those cloud services got a nod from shareholders, who sent the stock up as much as 3.9 percent Friday.

“If you say it’s for building out cloud services, investors shut their piehole because they want them to invest in that,” said Kim Forrest, senior portfolio manager at Fort Pitt Capital Group LLC in Pittsburgh, which owns Microsoft shares.

Meantime, the strength of Amazon’s and Microsoft’s cloud-computing businesses are giving a boost to Intel, whose doubters have been arguing its earnings would suffer from a slowdown in spending on data centers and an erosion of its dominance of computer chips. But the world’s second-largest chipmaker said 2018 is looking better than expected thanks to strong demand for the chips that power cloud computing.

Growth in Intel’s data-center group has become one of the key indicators of the company’s overall performance, and investors are focused on whether that unit can maintain the double-digit revenue-expansion rate executives have promised. Sales were up 24 percent for the unit in the first three months of the year, and Intel expects the trends that propelled that surge — strong orders from companies that operate giant data centers such as Amazon and Microsoft — will continue this quarter.

Semiconductor stocks had been among the hardest hit up until this week. A rally that had sent many companies to their highest value since the dot-com bubble looked to be ending when Taiwan Semiconductor Manufacturing Co., a maker of key parts for the iPhone, predicted sales of about $1 billion lower than analysts had been estimating.

Intel’s report Thursday followed a positive projection by Texas Instruments Inc. earlier in the week. The two companies gave numbers that seem to indicate any slowing of demand for electronic components may be confined to parts for Apple’s flagship product. Intel’s computer-industry base and Texas Instruments’ industrial and automotive clients are ordering strongly, according to the companies.

The benchmark Philadelphia Stock Exchange Semiconductor Index rose 2.1 percent Thursday, its first gain in seven sessions. Apple reports earnings on May 1.

Things weren’t entirely rosy for the week. Alphabet’s shares tumbled 4.8 percent on Tuesday after Google’s parent company reported capital expenditures of $7.7 billion for the first quarter and said it planned to keep pouring money into newer businesses like cloud computing and consumer devices.

— With assistance by Sarah Frier, and Ian King

(Updates with shares in fifth paragraph.)
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