Activision Blizzard blew out analysts' Q3 expectations on continued strength from its 'Call of Duty' franchise.
(Bloomberg Opinion) -- Beijing’s goal of building a self-reliant technology industry has been elevated to become a strategic pillar, part of the latest five-year plan setting out top national priorities. This means that China is redoubling efforts to wean itself off foreign companies, with the result likely to be a cohort of domestic giants and a slow freeze-out of overseas competitors.Just as the U.S. government starts looking to rein in, or even break up, big technology companies in the belief they have too much power, China is going in the opposite direction. We should expect to see more money, more policy favoritism, and more attention from party cadres aimed at ensuring the establishment of big successful chip and software firms.The Fifth Plenum of the Chinese Communist Party's 19th Central Committee wrapped up Thursday by tasking the nation to, among other things, develop self-reliance and build its technological power.The result will be a more insular approach to industry and trade as Beijing strengthens a robust domestic market for those up-and-coming heroes to ply their wares.Foreign companies — notably in semiconductors, software or materials — that still believe China is a viable long-term business are kidding themselves. Only those supplying crucial products and services not available locally will have any shot at sustained market access, and even then only until a domestic alternative comes along. Intel Corp., Nvidia Corp. and Microsoft Corp. should take note. Apple Inc. and Alphabet Inc. ought to be wary. Meanwhile, suppliers of the equipment, chemicals and software used to design and build chips should enjoy eating at the trough now, because the good times won’t last, if Beijing can help it.The likes of ASML Holding NV, Tokyo Electron Ltd., and Synopsys Inc. might see some growth years as Chinese companies lean on them to supply the core ingredients of a semiconductor industry, if the U.S. administration doesn’t get in their way to further stymie China’s advancement. But they’d be foolish to not understand that local rivals, backed by Beijing, are doing everything possible to replicate their products. Over the past decade, the government has done a lot to improve intellectual property enforcement and secure economic rights over technological innovation. Nonetheless, it would be a brave Chinese prosecutor or judge who sides with a big Western company over a local upstart in any case of alleged IP theft. I believe we’ve yet to see the next era of national champions emerge. Alibaba Group Holding Ltd. and Tencent Holdings Ltd. have been the backbone of China’s internet development. Beijing would want to see their equivalents in semiconductors come forth. Huawei Technologies Co. fits the role, a fact that Washington recognizes by attempting to impede the Shenzhen company’s chip division HiSilicon. Semiconductor Manufacturing International Corp. will also play a part, but after two decades it has still failed to match rivals like Taiwan Semiconductor Manufacturing Co. or United Microelectronics Corp. Then there’s a collection of state-backed chipmakers such as those in the orbit of the esteemed Tsinghua University.Yet the Alibaba of chips may not yet be born.It could be bubbling away in a small Shenzhen office, helmed by former HiSilicon execs determined not to give up their semiconductor dreams despite Washington’s pressure. Or the topic of Zoom calls among locked-down postgrads finishing up their American degrees and planning to return home. Or in the bank balance of a Taiwanese engineer, enticed by the promise of vast riches, after a decade of toiling away at TSMC.Whoever the next big Chinese tech giant is, you can be sure that Beijing has the money and determination to make sure it succeeds. At all costs. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The world’s largest tech companies notched a blowout third quarter on Thursday, aided by a pandemic that spurred demand for smartphones, e-commerce and cloud computing for at-home workers. Less upbeat was the outlook for the rest of the year.In a closely watched measure of how four of the five biggest companies in the world are faring, Facebook Inc., Amazon.com Inc., Apple Inc. and Alphabet Inc. shrugged off fears over regulatory scrutiny and a frothing tech bubble to post earnings for the September quarter that beat projections.But shares in Apple, Amazon and Facebook dropped as the companies sought to temper expectations of sustained outperformance, warning that growth later this year and beyond will be affected by the ongoing coronavirus. A virus that sometimes benefited Big Tech at the outset also poses new threats to the sector as cases spread in winter and economic stimulus runs out. The share slump was another sign that estimates for the industry have grown overly optimistic.Apple’s iPhone sales missed estimates for last quarter as customers held off purchases ahead of the release of the iPhone 12, while revenue in China, its second-biggest market, dropped a whopping 29%. Apple Chief Financial Officer Luca Maestri told Bloomberg TV that even though Apple has seen a positive response to the iPhone 12 in the first few days of sales, the “fundamental reason why we’re not providing specific guidance for revenue is because of the uncertainty due to Covid.” The company said only that it does expect growth in sales of the iPhone and double-digit gains in all other products and services. Shares fell about 5%, the biggest after-hours drop for the four big companies that released results Thursday.Amazon cautioned investors that increased spending related to Covid-19 could dent profitability in the busy holiday quarter and said that the profit margin of Amazon Web Services, its money-minting cloud arm, dropped slightly. Amazon’s operating income forecast fell short of analyst estimates, sending shares down about 1.5% in extended trading after closing at $3,211.01, a 74% gain so far in 2020.Facebook, in a statement, warned of “a significant amount of uncertainty” in 2021, citing unpredictable online spending trends during the pandemic, regulatory challenges and changes to ad rules on Apple’s devices. It saw an unusual decline in users in the U.S. and Canada, its most lucrative ad markets, despite growth overseas. Shares dipped about 1% in after-hours trading after closing at $280.83, a 37% gain for the year.Alphabet staged a return to growth last quarter after a decline in the June period, reflecting a rebound in digital advertising. It also posted a 32% increase in sales at video-sharing giant YouTube. Even so, CFO Ruth Porat struck a cautious tone on a call with analysts, saying that despite a revival in advertising, “there’s obviously uncertainty in the external environment.” Alphabet shares rallied 7% in extended trading. They had climbed a more modest 16% this year through Thursday.Much of the pessimism stems from the mounting evidence that the global coronavirus pandemic is worsening. That, combined with a lack of economic stimulus from the government, is fueling concern that holiday-season spending on advertising, smartphones and e-commerce will ebb.In the coming months, the tech giants will also have to face a worsening bout of tech-bashing as the U.S. Department of Justice’s case against Google pushes forward, lawmakers plan more congressional grillings of tech executives, and short sellers like David Einhorn bet more money on a tech bubble bursting.With a combined market capitalization of $5.3 trillion, the four companies make up nearly a fifth of the entire S&P 500. So the question will be whether these companies are underpromising only to power past forecasts again in the current period -- or are they truly girding for a market softening in the months to come. Here’s what to watch for next:Pandemic’s biggest winnerAmazon’s got its hands in all the right businesses at precisely the right time. It’s not just the surge of consumers buying their groceries online and expectations for a holiday sales bonanza that’s turbocharged Amazon’s business. The company’s digital advertising and cloud computing arms have also helped to position Amazon as perhaps the biggest winner in American business this year.Amazon posted a robust quarter in terms of revenue, but more telling is that its per-share earnings jumped to $12.37 from $4.23 a year earlier. Amazon tends to spend wildly and inconsistently from quarter to quarter, and warned that increased costs related to Covid-19 and fulfillment during the all-important holiday quarter will bite into profits. The numbers will also be murkier to compare for Amazon’s retail business, as it delayed its popular “Prime Day” shopping holiday to October from July.Cloud is kingAlphabet’s Google Cloud and Amazon’s Web Services division both benefited from corporate customers that are using their services to keep companies running as workers stay home and more of their customers head online. Google’s Cloud revenue jumped 45% to $3.4 billion, while AWS sales rose 29% to $11.6 billion.The reports follows similar success for Microsoft’s cloud business, Azure, which posted a 48% rise in revenue from a year before and is now second only after Amazon.But while Amazon’s cloud computing division hit revenue estimates, its profit margin dropped. That’s important because AWS profits help subsidize the rest of Amazon’s operations, and investors will be keeping an eye on how much more Amazon will have to spend to sustain revenue growth.Digital advertising revs backFacebook and Alphabet said the market for digital advertising has revved back after an initial pandemic drop.About 90% of Google’s revenue stems from advertising, much of it linked to search results, which took a dive as companies held back spending at the beginning of the health outbreak. The second quarter was Google’s first without revenue growth in its two-decade history.But now, as people adjust to spending more time at homes and brands chase more online revenue, they’re shifting ad budgets back to platforms in hopes of getting more eyeballs. The reports followed similar revenue increases at Pinterest Inc. and Snap Inc. that suggested as screen-time hours jump, advertisers are spending more on web platforms.Facebook said a short-lived brand boycott of Facebook tied to Black Lives Matter protests did little to impact its financial performance.Shifting to ‘things’ from ‘experiences’Even as Apple held off on specific forecasts, executives said that the latest version of the iPhone has been well received and that they’re optimistic on its prospects.Some analysts concur, saying the current quarter is when the sales magic will happen as consumers unleash pent-up demand.“People decided to wait another year and I think they’re going to pull the trigger now,” Jeremy Bryan, Gradient Investments portfolio manager told Bloomberg TV. “We’re shifting back from experiences to more things, we’re not going anywhere, we’re not taking trips, so I might as well buy an iPhone.”Is this really a tech bubble?There’s a lot of commentary out there about the fortress of profitability the tech companies have built up around them -- that the reason why they’re doing so well, as companies around the world suffer from a global pandemic and economic recession, is partially because of the monopolistic power and anti-competitive behavior regulators are now going after. Others attribute tech’s remarkable stock run-up to signs the industry is entering into another frothy period like the 1999 tech crash.It might feel like 1999, but we’re far from it, said Bloomberg Intelligence’s Anurag Rana. Rana pulled the numbers to study whether today’s valuations are as stratospheric as they were in the late 1990s. It turns out, the average large-tech company multiple is still less than half that of the dot-com bubble, he said.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.