By Therese Poletti
Tech’s continuing financial dominance has been a huge part of Wall Street’s surge during the COVID-19 pandemic, but it appears that the supply-chain problems hurting other industries will not skip Big Tech.
Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +1.63% and Apple Inc. /zigman2/quotes/202934861/composite AAPL +2.19% are prominent examples of tech companies expected to experience or forecast shortfalls related to the global supply chain in the coming earnings season. The overall decline in expectations means that the second quarter of 2021 will likely be the peak for earnings growth this year for the core IT sector — which includes computers, hardware, storage, semiconductors, software, IT services and communications equipment — as well as the consumer discretionary segment that includes Amazon.
The information technology companies in the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.32% are forecast to report double-digit earnings growth of 29% and revenue growth of 19% in the third quarter, according to FactSet, a slowdown from the second quarter, when earnings soared 48% from the previous year and revenue jumped 22%. Most of the continued gains are expected to come from the subsector at the heart of many problems, semiconductors, which are again expected to show the biggest growth (with the exception of Intel Corp. /zigman2/quotes/203649727/composite INTC +2.50% ).
Others could suffer from the lack of chips, including Apple, which is reportedly lowering its iPhone 13 production targets due to semiconductor and component shortages. While some analysts believe any iPhone sales that Apple misses out on will just show up in later quarters, analysts are still trimming Apple’s estimates for the back-to-school and holiday shopping seasons.
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“There are pieces of IT — the tech sector — that will do really well, and others that won’t do that well,” said Brendan Connaughton, founder and managing partner of Catalyst Private Wealth in San Francisco. “Tech will grow a little faster than the market as a whole.”
Amazon, which seemed to be situated perfectly for the pandemic with its dominant online-shopping and cloud-computing businesses, has seen expectations drop rapidly since sales growth slowed more than expected in the second quarte r. FactSet Senior Earnings Analyst John Butters noted that analysts’ average estimates for Amazon earnings dove from $12.89 a share to $8.92 a share during the third quarter, leading to the biggest decline in earnings expectations for any of the S&P 500’s 11 sectors during the period, -7.6%. Expectations have since declined to $8.90 a share, after Amazon put up earnings of $12.37 a share in the third quarter of 2020.
Even with that decline in expectations, some analysts predict Amazon could surprise on the negative side, after seeing a surge in costs that are likely to affect its profits. The company has been investing heavily in its logistics build-out and has been spending billions on its delivery network and rising employee costs , while other issues have grown.
“Persistent supply-chain issues, which will likely extend well into 2022, could present a risk to our forecast,” Cowen & Co. analyst John Blackledge said of Amazon in a recent note.
Amazon’s highly profitable growth engine, AWS, is also slowing down a bit. Evercore ISI analysts said they are looking for AWS revenue to grow 34% on a year-over-year basis, compared with 37% growth in the most recent second quarter.
“Cloud will grow but not at the rate it has been growing at,” said Maribel Lopez, principal analyst at Lopez Research, referring to the cloud-computing market in general. “Clearly everyone who needed cloud has started it, but will people still be growing at 40%?”
See also: Why Amazon and Microsoft won’t have a stranglehold on cloud computing forever
One of the biggest explosions in tech spending during the pandemic has already showed a slowdown, and is also related to the supply-chain struggles and semiconductor shortage. During the pandemic, many consumers and businesses upgraded their computers for remote work and teleconferencing, leading to a huge boom in the PC industry.
But that boom appears to be done, for now.
“I think numbers will be solid but won’t show that exponential growth that we saw over the last few quarters,” said Lopez. “Now people around the world are up and running with whatever they need to be up and running with. The next big [purchasing] wave won’t happen for another six months.”
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Market-research firms Gartner and IDC said that worldwide PC units growth had returned to low single digits in the third quarter, with Gartner reporting unit shipments grew 1% and IDC projecting PC growth of 3.9% in the third quarter. Demand hasn’t slowed as much as the ability for PC makers such as HP Inc. /zigman2/quotes/203461582/composite HPQ +3.90% to get all the components they need to make PCs.