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February 8, 2022updated 10 Feb 2022 3:35pm

Earnings season drama and the next Internet

By GlobalData Technology

The recent earnings season yielded some signal results from the tech titans and a bonanza for chaos craving traders already getting adrenaline rushes from the combination of central bankers caught between a rock and a hard place, Covid-19, the impact of messy global supply chains, heavily over-bid key commodity markets, and geopolitical tensions.

The metaverse was the season’s strongest underlying theme. This immersive digital world already exists but, in the words of one leading venture capitalist, “kinda sucks.” Now, facilitated by virtual reality (VR) and augmented reality (AR) headsets, it will start to morph into a network of 3D virtual worlds focused on social connectivity where we will increasingly live and work. At least that’s the vision.

Meta shares slump

On 2 February, Mark Zuckerberg’s pioneering Meta saw its shares slump 26% in a single after-hours session. This slaughter reflected concern about the quarterly loss of $10 billion on its Reality Labs division, which is spearheading Meta’s drive to dominate the metaverse on the back of an evolving infrastructure of VR and AR devices, artificial intelligence (AI), and content. A key offering for Meta is the Oculus Quest 2 VR headset. However, no announcement was forthcoming about Quest 2’s actual and forecast sales with what promises to be deadly competition looming this year from an Apple headset.

Market concern also reflected Facebook’s maturity, as, inevitably, its huge number of active monthly users, over 2 billion, flatlined. At the same time, Apple’s ‘privacy’ action threatens Facebook’s digital ad business, which generates more than 95% of revenue. It relies heavily on being able to track Apple users’ behavior. Zuckerberg needs to create an alternate reality where, among other things, he won’t have to rely on the whims of the owners of iOS and Android to chart his path.

Microsoft and Apple earnings on the rise

A different story came from Microsoft, with a 32% rise in its cloud business while increasing its gross margin to 70%. Microsoft Cloud now accounts for over 40% of the company’s revenues. Due attention was paid to its $68.7 billion acquisition of Activision Blizzard, but there was disappointment that Microsoft seems to have canned HoloLens 3—a potential metaverse access device.

Apple reported revenue growth of 24% in its service business, which is now estimated to account for a third of group profit. It was a bullish earnings signal as iPhone sales flattened, albeit in part due to supply problems. There is plenty of scope for music, TV, fitness, insurance, and more to orbit around 1.7 billion Apple devices in the wild with VR and AR headgear and eyewear to come by 2027, and potentially even a car. Apple will be Meta’s leading competition initially as its VR headset, due this year, will be based on two MI processors enabling it in all probability to seriously outperform Facebook’s Quest 2. Moreover, hardware design combined with superior performance is the ace in the hole, and Apple has no peer.

Earnings progress for Alphabet

Alphabet reported marked progress on the back of its signature AI prowess in its knowledge and information products. YouTube, for example, is now viewed 15 billion times a day. Together with continuing growth in Search and Maps, this enabled the digital ad business, which accounts for over 80% of Alphabet’s total revenues, to grow by 33%. But despite a heavy investment over several years in Google Cloud, it still trails AWS and Microsoft Azure. The company has committed to beefing up its cloud capital spend and developing cloud packaging services for specific verticals like health, manufacturing, and finance. There was disappointment that Alphabet did not directly address its metaverse strategy. This should be corrected at its annual I/O event, which is as yet unscheduled but is likely to be held in early May.

The day after the Facebook shock, Amazon’s AWS subsidiary reported 40% revenue growth from the same period of the previous year. Together with the proceeds of the Rivian EV IPO, this performance enabled Amazon to blow past market forecasts about its quarterly earnings per share (EPS). It also announced a modest increase in its monthly Prime subscription charge. Its shares rose 14% in after-hours trading in stark contrast to Facebook’s experience the previous evening.

Regulatory threats and strategies

Like Facebook and Alphabet, Amazon faces a raft of regulatory threats and lawsuits. Clearly, it has the tech stack, product range, and huge sticky user base to be a major player in the metaverse, however it is defined.

Sony reported that the success of the Spider-Man blockbuster movie had boosted its year-end revenues. It also stressed its electric vehicle (EV) project is real. Last month, it displayed a prototype at CES that was a rich mobile entertainment center. In addition, it has acquired Bungie of Halo and Destiny fame to beef up its gaming operation.

There were feisty results from AMD, with the Xilinx take-over likely to be approved by April, further strengthening its competitive position against Intel in the key data center arena. Intel boss Pat Gelsinger dubbed the tussle ‘’a knife fight in a telephone booth’. Meanwhile, no insight was forthcoming from Intel about its metaverse strategy. That will be spelled out at the company’s investor day on 17 February.