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The economy is in record decline, but not for the tech giants

Even though the tech industry’s four biggest companies were stung by a slowdown in spending, they reported a combined $28 billion in profits on Thursday.

July 31, 2020 / 12:38 PM IST

A day after lawmakers grilled the chief executives of the biggest tech companies about their size and power, Amazon, Apple, Alphabet and Facebook reported surprisingly healthy quarterly financial results, defying one of the worst economic downturns on record.

Even though the companies felt some sting from the spending slowdown, they demonstrated, as critics have argued, that they are operating on a different playing field from the rest of the economy.

Amazon’s sales were up 40% from a year ago, and its profit doubled. Facebook’s profit jumped 98%. Even though the pandemic shuttered many of its stores, Apple increased sales of all its products in every part of the world and posted $11.25 billion in profit. Advertising revenue dropped for Alphabet, the laggard of the bunch, but it still did better than Wall Street had expected.

“The strong continue to get stronger,” said Dan Ives, managing director of equity research at Wedbush Securities. “As many companies are falling by the wayside, the tech stalwarts continue to gain muscle and power in this environment.”

The tech companies’ financial performance was a remarkable contrast to the overall health of the U.S. economy. The Commerce Department said Thursday that the country’s gross domestic product fell 9.5% in the second quarter of the year as consumers cut back spending. It was the steepest drop on record.

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Combined, the companies reported $28.6 billion in quarterly net profit, underscoring how regulatory scrutiny remains more background noise and a distraction for them than an imminent threat to their businesses.

On Wednesday, a congressional antitrust panel questioned the companies’ leaders — Jeff Bezos of Amazon, Tim Cook of Apple, Mark Zuckerberg of Facebook and Sundar Pichai of Alphabet — about their market power and business practices.

It was part of a broader inquiry by regulators and lawmakers into the dominance of the tech giants, with open investigations from the Justice Department, the Federal Trade Commission and state attorneys general.

The spectacle of the chief executives of the four companies, worth nearly $5 trillion by market capitalization combined, appearing before a House subcommittee was historic. But antitrust investigations often take years, especially if regulators seek more drastic measures like breaking up companies.

The pandemic has reinforced the advantages held by the big tech companies. As consumers stay home, demand for Amazon’s shopping site surged, while companies are turning to its cloud computing products to keep their services up and running. Apple said the shift to working and learning from home had led more people to splurge on Apple’s devices and use its services.

“Our products and services are very relevant to our customers’ lives, and in some cases, even more during the pandemic than ever before,” Luca Maestri, Apple’s finance chief, said in an interview. He noted, however, that Apple could have made several billion dollars more if not for the pandemic.

Facebook and Google continue to be important to marketers, and they are weathering the downturn in advertising better than rivals. Facebook shrugged off a spending slowdown, hailing record levels of engagement with its products.

Alphabet said revenue from Google search ads fell 10% — pushing the company’s overall revenue lower for the first time in the company’s history — but that still was better than rivals. Last week, Microsoft reported an 18% slide in search advertising revenue.

Since the beginning of March, the companies’ stock prices have risen by an average of 35%, compared with a 10% rise in the S&P 500.

Amazon

Buoyed by a pandemic-induced surge in online shopping, Amazon had $88.9 billion in quarterly sales, up 40% from a year earlier. Profit doubled, to $5.2 billion, even though the company invested in expanding warehouses and other ways to increase capacity.

“Simply put, COVID-19, in our view, has injected Amazon with a growth hormone,” Tom Forte, an analyst at the investment bank D.A. Davidson & Co., wrote in a recent note to investors.

In April, Bezos told investors to expect no operating profit, and maybe even a loss, as the company planned to spend about $4 billion on coronavirus-related expenses like temporary pay increases, declines in warehouse efficiency because of social distancing, and $300 million for testing its workforce for the virus.

But even those costs did not compare to the immense surge in demand, with online retail sales up 48%.

On a call with reporters, Amazon declined to say if it would give its warehouse workers virus-related bonuses or raises in the current quarter but added that pandemic-related expenses would fall to $2 billion in the quarter.

Sales at Amazon’s lucrative cloud computing business, whose customers include major corporations and small startups, grew 29%, to $10.8 billion, falling short of analyst expectations, although it was more profitable than they had expected.

Facebook

Facebook’s revenue for the second quarter rose 11% from a year earlier to $18.7 billion, while profits jumped 98% to $5.2 billion. The results were well above analysts’ estimates of $17.3 billion in revenue with a profit of $3.9 billion, according to data provided by FactSet.

Despite increasing scrutiny from regulators, questions about its role in subverting elections and how people use the platform to spread misinformation, neither users nor advertisers have shown an inclination to stop using Facebook.

More than 3 billion people now regularly come to Facebook or one of its family of apps, as the services have overtaken much of the developed world. And some 2.47 billion people use one or more of Facebook’s apps every day.

The company said that its number of monthly active users rose 12% from a year ago and added that it was seeing record levels of engagement and usage this year because of shelter-in-place orders around the world.

In late June, a grassroots campaign, Stop Hate for Profit, rallied many of the top advertisers on Facebook to reduce their spending because of issues with hate speech on the site.

Facebook cautioned investors Thursday that fallout from the ad boycott was noticeable in July and warned that greater economic turmoil from the pandemic could eventually hurt Facebook’s bottom line.

Apple

Despite the global economic slowdown, people kept buying Apple devices en masse and paid the tech giant billions of dollars more for apps and services on those gadgets.

Apple said its sales rose 11% to $59.7 billion and its profits increased 12% to $11.25 billion. Both figures handily beat analysts’ expectations, with Wall Street having forecast declines in both areas.

Sales were particularly strong for iPads and Mac computers, as the public was increasingly forced to work and socialize virtually. Revenue also surged in its internet-services business, which include Apple’s cut of sales from the App Store, the subject of antitrust investigations in the United States and Europe.

Even the iPhone, which remains the company’s biggest seller, had a slight increase in sales for only the second time in the past seven quarters.

Apple also announced a stock split Thursday that would quadruple its number of shares, allowing people to buy a share in the company for a quarter of the current stock price, which closed at $384.76 on Thursday.

Alphabet

Google’s parent company, Alphabet, reported its first-ever decline in quarterly revenue, hurt by a slowdown in spending by advertisers. The company posted revenue of $38.3 billion and a profit of $6.96 billion — significantly higher than what Wall Street analysts had predicted.

Ruth Porat, Alphabet’s chief financial officer, said advertising revenue “gradually improved” as the quarter went on. The decline came largely from lower sales of advertisements that run alongside Google’s search results, but the company’s efforts to diversify its business paid off as revenue from YouTube ads and its cloud computing business grew.

When asked in a call with financial analysts about the congressional hearing, Pichai said the company would have to learn to live with the investigations.

“The scrutiny is going to be here for a while, and we’re committed to working through it,” he said.

c.2020 The New York Times Company
New York Times
first published: Jul 31, 2020 12:38 pm

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