Business hope protects tech sector, for now

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The latest round of tech earnings is starting to show a clear divide between areas that could continue to grow and those that will most certainly suffer from a global economic downturn. Whether the more resilient sectors succumb or, conversely, cause parts that have collapsed to rebound, will be a key question to watch over the coming months.

Most of the big names in tech hardware have already released 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.

Overall, we can conclude that consumer spending and spending on discretionary items – those that are short-term or non-essential – are falling sharply. Yet business demand is robust, especially for infrastructure and equipment such as data centers, communication networks and industrial applications.

The escalation of inflation is a major factor of uncertainty. Consumer prices in the United States soared 9.1% in June, the highest level in more than 40 years, and central banks around the world are raising interest rates to address the problem. This higher cost of money is hurting the economy, plunging the United States 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 deliver its financial report and predict the future. If one only looked at this company, and not too deeply, one would think that all is well with the world. Earnings beat estimates and its outlook far exceeded analysts’ expectations. But amid the fine print and pie charts, there was some clarity about what’s hot and what’s not.

Sales of chips used in smartphones rose only 3% from the previous quarter, no longer representing the largest revenue bracket. In contrast, high-performance computing, which includes processors used in artificial intelligence, data centers and 5G mobile networks, grew by 13%. Revenue for this division was up about 50% from a year earlier, according to calculations by Bloomberg Opinion.

Figures from Intel and Samsung tell a similar story.

As the world’s largest manufacturer of central processing units (CPUs) for computers and servers, Intel depends on only a small part of the technology industry. It doesn’t look pretty. Revenues from its client computing group, which sells chips used in desktop and laptop computers, fell 25% from a year earlier, as that division’s operating margin shrank 65%. Its data center division fell 16%, in part because customers who make data center servers try to cut inventory, and a greater proportion of what it sold were low-cost chips. . Tellingly, its network and edge division (wired and wireless communications) actually soared. What’s most chilling is that Intel has cut its full-year revenue outlook by 15%.

At Samsung, slumping consumer demand is hurting memory chip sales, the bread and butter of the South Korean giant’s revenue, because people just aren’t buying personal computers as much. Smartphone sales were also weak, he added. Still, demand for memory used in enterprise applications such as servers remains solid, as does that for its 5G network infrastructure business. The company also issued a simple warning that problems in the PC industry could spill over to enterprises. Lattice Semiconductor Corp., a small designer of specialty chips, showed a similar trend on Monday. Its consumer division fell, while its industrials, automotive and communications sectors soared.

Apple is a curious case. iPhone revenue rose a modest 2.8% from a year ago. Still, its services business, which includes Music, iCloud and the App Store, jumped 12%. Meanwhile, Mac sales fell 10%. We tend to think of smartphones as a discretionary consumer purchase, and Apple’s more expensive computers as being aimed at businesses and niche users like designers and software developers. Rather, these numbers may indicate that a new iPhone is a must-have, especially if it’s time to upgrade, whereas buying a fancy new laptop or powerful desktop computer can wait a bit longer. long time.

There is plenty to see until the end of this year. Inflation is still unchecked, the Russian invasion of Ukraine continues (with an impact on energy prices), sporadic blockages are still occurring in China and tension is rising in the Taiwan Strait . If business demand continues, including long-term investment in communications and data center infrastructure, the tech sector could come out relatively unscathed. But if economic uncertainty lasts too long, even areas that once seemed robust are likely to falter.

More from Bloomberg Opinion:

• TSMC has a $40 billion inflation vaccine: Tim Culpan

• What is most important? Covid zero or three red lines: Shuli Ren

• Hiking early doesn’t mean taking a break later: Daniel Moss

This column does not necessarily reflect the opinion of the Editorial Board or of 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 at bloomberg.com/opinion

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