What do Big Tech earnings tell us about the health of consumer demand?

Image Credits: Nigel Sussman

How healthy is the market for technology products today?

The question is too broad. Large markets can have varying internal results that contrast with top-line numbers. An example of this from recent history is disparate results in venture capital activity we’ve noted around the world. While the aggregate venture market is slowing, we’ve also seen pockets of strength in certain regions. Are tech sales similar?

Some secular trends are powering technology growth. The movement off of on-prem solutions to public cloud providers, for example, among enterprise customers. As we learned when COVID-19 was driving lockdowns around the world a few years back, economic downturns don’t necessarily impact most of the tech world as much as they do other parts of the global economy. (This is perhaps why software valuations have stopped losing ground, despite a worsening global macroeconomic profile.)

 

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But that’s the business perspective. What about consumers? How are the folks out there doing? Today we’re taking a look inside Big Tech results from the week to try to answer that particular question, which relates directly to startups hoping to serve the same consumer demands.

Several investors have told TechCrunch that a recession is likely to impact consumers more quickly than corporations. That means we should expect to see worse consumer results from megacap tech companies than business outcomes. Are we? Let’s take a peek and see what the data says. (Warning: This post is going to be a bit nerdy. You have been warned!)

Direct consumer spend

Amid Apple’s latest quarterly earnings, the company’s hardware results gave us mixed signals.

On one hand, revenue from iPhone sales was up and only slightly down for iPads. On the other, net sales fell significantly for Macs, as well as its “wearables, home and accessories” category.

Then again, the latter is a composite category lumping together everything from AirPods to HomePods, which could be impacted by myriad factors, such as people spending less time at home or commuting.

Another caveat is that Mac hardware is often bought for professional purposes. From that perspective, iPhone sales are likely a better proxy for pure consumer demand. And if you only look at that number, it isn’t bad news: iPhone revenue increased by 3% compared to the same time period in 2021, from $39.5 billion to $40.7 billion. (Apple also noted in its earnings call that it “set June quarter records in both developed and emerging markets” when it came to iPhone sales in the quarter.)

Then again, not everyone can afford an iPhone.

As TechCrunch’s Brian Heater noted, “Apple’s products have long been regarded as something of a bellwether for luxury good purchases.”

If we want to get a better sense of general consumer demand in the context of rising inflation, we will have to look further than Apple and its affluent customers. Let’s start with Microsoft, whose hardware sales also painted a complicated picture last quarter.

Since the company has pointed out the negative impact of foreign exchange rate fluctuations on its results, let’s use percentage changes in constant currency. Even then, Xbox hardware revenue was down year on year (8%), as was Windows OEM revenue (2%). Surface revenue was up, but we’re once again talking about a hybrid-use product, which only goes so far in indicating consumer demand.

One final Microsoft data point worth considering is sales of its Microsoft 365 consumer software service. Akin to Office 365 for corporate customers, Microsoft also sells its productivity suite as a subscription to consumers. And in its most recent quarter, Microsoft 365 consumer subscribers grew from 58.4 million in the previous quarter to 59.7 million in the most recent three-month period. Growth is good, yes, but that +1.3 million figure was down from a +2.0 million result in the first calendar quarter of 2022. That’s not only a material deceleration, but also the slowest single-quarter gain in Microsoft 365 consumer subscribers for some time.

Turning the page, Amazon’s revenue is much more relevant for our task, as long as we exclude AWS data. The dataset doesn’t tell us how much the company made from e-commerce versus adjacent services, such as Prime Video. But it shows that Q3 net sales from non-cloud activities in North America were up compared to the same period last year. And while they declined in the rest of the world, international sales represent a smaller amount than its North American sales.

Since Big Tech numbers are still somewhat contradictory, let’s complete this with another perspective, coming from credit card giant Mastercard. Talking to MarketWatch, its chief financial officer said that “the consumer remains very strong from what we’re seeing.” Confused yet?

And yet…

Despite some positive data points regarding consumer spending amid a somewhat mixed picture, there’s a pullback afoot in the advertising market that is worth keeping in mind. Generally speaking, when the economy is hot and consumers are spending freely, the advertising market grows as brands and stores compete for sales. But when the economy slows — and thus consumer spending likely contracts or at least sees a more measured pace of expansion — we tend to see falling advertising incomes.

So when we considered slowing ad-based incomes from megatech earlier this week, we might have anticipated a more lackluster consumer spending market for technology purchases than was warranted.

Recall that while Meta had somewhat weak numbers along with rival Snap, Microsoft’s search and news ad incomes were up. Amazon added another positive-ish number to the milieu, namely 18% growth in Q2 2022 to its advertising business, the second-quickest pace of growth at any Amazon division, discounting the minute “other” category. Despite that, the pace of growth in Amazon’s advertising business has decelerated from high double-digit year-on-year growth to a fraction of that pace.

The question we have now is whether the weaker advertising market was in anticipation of a consumer spending slowdown that has perhaps not materialized as expected or in response to consumer spending tanking later in the quarter. Our inclination is to weigh the first option as more likely than the second, but we’ll have to wait another quarter for clarity.

The tech market is huge and complicated, making the consumer-enterprise spend split not entirely clean given how some companies report their numbers. But Big Tech did better in Q2 than many anticipated — just check investor reaction to Amazon’s numbers, to pick an example — making the market profile muddled. Certainly, we are no longer “up and to the right” everywhere as we saw last year, but perhaps 2022 is not quite as bad as some expected.