Analysis | Corporate hope dampens tech sector for now – The Washington Post | Hot Mobile Press


The recent string of tech earnings is beginning to show a clear division between areas that may continue to grow and those that are certain to suffer from a global economic slowdown. Whether the more resilient sectors falter or, conversely, drive a recovery in the slumped parts will be a key question to watch over the coming months.

Most of the big tech hardware names have already reported June quarterly earnings and given their outlook for the second half of this year. These include Apple Inc., Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co., and Intel Corp.

Generally speaking, we can see that consumer spending and spending on discretionary items – which are short-term or non-essential – are falling sharply. Nonetheless, business demand is resilient, particularly for infrastructure and equipment such as data centers, communications networks and industrial applications.

Escalating inflation is a key uncertainty factor. US consumer prices rose 9.1% in June, the highest 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, propelling the US into two straight quarters of contracting GDP (a so-called technical recession). Meanwhile, China – the world’s second largest economy – is grappling with Covid-19 lockdowns and a deepening housing crisis.

TSMC was one of the first to submit its financial report and predict the future. If you just look at this company, and not too deeply, you might think all is right with the world. Earnings beat estimates and the outlook far exceeded analysts’ expectations. But amid the fine print and pie charts, it was clear what’s hot and what’s not.

Sales of chips used in smartphones rose just 3% sequentially and no longer accounted for the bulk of revenue. In contrast, high-performance computing, which includes processors used in artificial intelligence, data centers and 5G cellular networks, grew 13%. According to calculations by Bloomberg Opinion, sales in this division increased by about 50% year over year.

Figures from Intel and Samsung tell a similar story.

As the world’s largest manufacturer of computer and server central processing units (CPUs), Intel is uniquely reliant on a small slice of the technology industry. It does not look good. Revenue at its client computing group, which sells chips used in desktop and laptop PCs, fell 25% year over year, with operating margin in that division shrinking 65%. The data center division declined 16%, in part because customers who make data center servers are trying to reduce their inventories and a larger portion of the chips sold were lower-priced. Significantly, the network and edge division (wired and wireless communications) actually increased. Most startlingly, Intel cut its full-year revenue guidance by 15%.

Over at Samsung, lower consumer demand is hurting memory chip sales, the South Korean giant’s bread-and-butter income, because people just aren’t buying as many PCs. Smartphone sales were also weak, it said. However, demand for storage for enterprise applications such as servers remains solid, as does that for the 5G network infrastructure business. The company also issued a simple warning — problems in the PC space could spill over into the enterprise business. Lattice Semiconductor Corp., a smaller developer of specialty chips, showed a similar trend on Monday. The consumer division declined while the industrial, automotive and communications divisions rose.

Apple is an odd case. IPhone revenue increased a modest 2.8% year over year. However, the services business, which includes music, iCloud and the App Store, rose 12%. Meanwhile, Mac sales fell 10%. We tend to think of smartphones as a discretionary consumer purchase, and Apple’s more expensive computers as something for businesses and niche users like designers and software developers. These numbers may instead suggest that a new iPhone is a must, especially when it’s time to upgrade, while buying a snazzy new laptop or powerful desktop can wait a little longer.

There is a lot to see before the end of this year. Inflation is still not under control, Russia’s invasion of Ukraine continues (impacting energy prices), China is still in sporadic lockdowns and tensions are brewing in the Taiwan Strait. If corporate demand holds up, particularly long-term investments in communications and data center infrastructure, the technology sector could emerge relatively unscathed. But if economic uncertainty drags on too long, even areas that once looked resilient are likely to falter.

More from the Bloomberg Opinion:

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

• What is more 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 represent the opinion of the editors or of Bloomberg LP and its owners.

Tim Culpan is a columnist for Bloomberg Opinion covering technology in Asia. He was previously a technology reporter for Bloomberg News.

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