The Cloud Isn’t Immune....

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Tech Earnings Have Sent a Clear Message. The Cloud Isn’t Immune.

By 

Eric J. SavitzFollow

Nov. 4, 2022 4:41 pm ET

 

Heading into the latest earnings season, there was a widespread view that consumer spending had weakened, while business outlays on cloud computing and software would be resilient. The theory seemed perfectly logical to me, with companies looking for ways to leverage technology to get more efficient. And now that notion looks, well, less than perfect.

Earnings reports have blown up the theory that cloud-based software companies have some magical power that makes them immune to recession. The trouble started two weeks ago, when both Microsoft (ticker: MSFT) and Amazon.com (AMZN) posted results for their cloud businesses—Azure and Amazon Web Services—that showed signs of a spending slowdown.

Both Microsoft and Amazon noted that their customers were looking for ways to tighten spending—or at least, to get more bang for their cloud buck. To be clear, I remain a huge bull on the future of cloud computing—I wrote a cover story about Amazon earlier this year based on the theory that AWS is hugely undervalued. But I also warned recently that there was a risk that one or more of the cloud giants could miss expectations in the near term and trigger a market freakout—and that’s exactly what happened.

This past week, Twilio (TWLO) and Atlassian (TEAM)—two once red-hot providers of cloud-based software tools—both issued ugly forecasts for the coming months.

Twilio, which sells tools to help companies communicate with customers via messaging, voice, and video, withdrew its forecast for annual revenue growth of 30% or better. “Like many of our software peers, we’re seeing negative impacts on our business from the macro environment,” the company said in a letter to shareholders. “In the current market, we don’t believe 30%+ is achievable.”

Atlassian, which makes software-development and project-management tools, provides free versions of its software. But the company said that the conversion rate to paid plans is deteriorating and that paid customers are adding fewer users. The two trends, Atlassian said in a letter to shareholders, “are the result of companies tightening their belts and slowing their pace of hiring. In other words, Atlassian is not immune to broader macroeconomic impacts.”

As it happens, many cloud-based software companies have January fiscal years, which means their third quarters ended, appropriately enough, on Halloween. Those reports, which will start to arrive toward the end of November, will inevitably reveal more scary issues of the kind disclosed last week. And that poses a new risk for the battered enterprise software sector.

Meanwhile, the story from the consumer tech economy is more upbeat than anyone expected—shares of online retailing, travel, and gig-economy companies all fared relatively well on the week.

That’s after Amazon provided a dour outlook for its December quarter, projecting revenue of $140 billion to $148 billion, well shy of Wall Street’s estimate for $155 billion. Given the latest batch of earnings reports, it’s fair to wonder whether the miss had more to do with the slowdown in business at AWS than with online retailing.

Sure enough, this past week Etsy (ETSY) posted third-quarter revenue growth of nearly 12%, crushing its guidance. EBay (EBAY) reported revenue above its forecast, as well. Wayfair (W) said revenue was down 9%, but, once again, that wasn’t as bad as feared. All three stocks rallied.

Amazon, which is trading at its lowest level in more than two years, actually grew online-stores revenue 7% in the latest quarter. Investors have largely overlooked that development. For Amazon stock, the time has come to back up your Rivian and load up.

The travel sector looks even healthier, with solid results this past week from both Expedia (EXPE) and Booking Holdings (BKNG). Expedia posted 22% sales growth, while Booking’s revenue jumped 29%.

Booking CEO Glenn Fogel said in an interview that there’s “a little bit of a disconnect” between the buzz about a likely recession and what he’s seeing in his own travel business. He said there’s strong job growth in the hospitality and travel sector.

“People want to travel,” Fogel said. “There’s a lot of pent-up demand. They want to reconnect. They feel like they missed out after more than two years of the pandemic.”

Fogel is making no predictions for 2023 just yet and concedes there could be crosscurrents as the pent-up desire to travel runs into economic realities.

Booking also owns restaurant reservation service OpenTable, and trends are good there, too, according to Fogel. “People want to get out and about,” he says. “Restaurant reservations have increased.”

Consumers are still ordering in, too. You could see that in the latest results from food-delivery firm DoorDash (DASH), which posted 33% revenue growth in the quarter, up from 25% in the prior quarter.

But let’s not get carried away. Lyft (LYFT) cut 13% of its staff this past week, payment start-up Stripe chopped its workforce by 14%, and Amazon installed a corporate hiring freeze. The Fed just raised interest rates another three-quarters of a point, and Chairman Jerome Powell made it clear that he isn’t close to done trying to slow down the economy.

Recession or not, though, it sure looks like we’re all going to keep shopping, vacationing, and eating. Count me in on all three.

 

https://www.barrons.com/articles/tech-earnings-cloud-stocks-fall-51667594332?mod=hp_LEAD_4