2022 was a tough year for Silicon Valley. After solid growth for over a decade and a pandemic-induced boom, Big Tech behemoths such as Meta, Alphabet and Apple shed a combined market value of around $2.5 trillion due to macroeconomic headwinds, global supply chain issues and plummeting revenues. In November 2022, the Internet companies covered by Doug Anmuth, Head of the U.S. Internet team at J.P. Morgan, were down by 53% on average year-to-date, and by over 40% weighted by market capitalization—well below the performance of the S&P 500, which was down by 16% year-to-date.

Today, rampant inflation, rising interest rates, sluggish growth and a potential recession are forcing these companies to rethink their business models and reposition for the future. What is the 2023 outlook for Big Tech? Can the sector weather the storm?

Macroeconomic headwinds

Inflation is pressuring discretionary spending, and this is in turn dampening consumer demand for tech products and services. Apple has been particularly affected: In September 2022, the electronics giant told suppliers to pull back from efforts to increase assembly of the iPhone 14 product family due to declining sales.

“Economic conditions or shifting consumer demand could cause greater than expected deceleration or contraction in the handset and smartphone markets. This would negatively impact Apple’s prospects for growth,” noted Samik Chatterjee, Head of the Telecom & Networking Equipment/IT Hardware team at J.P. Morgan.

Big Tech companies are also grappling with volatile currency markets. Amazon Web Services, a subsidiary of Amazon that provides on-demand cloud computing platforms, has been affected by the surging U.S. dollar. “Given AWS prices mostly in USD, it is working closely with international customers for whom the service has simply become more expensive. In some cases, we think this is resulting in price concession in an effort the mitigate the impact for customers,” noted Anmuth. Plus, against a recessionary backdrop, some customers are moving to lower storage tiers or instance levels in a bid to control costs.

Likewise, Microsoft recently posted its worst quarterly revenue growth in five years, citing factors including U.S. dollar strength, which dented international earnings from its Azure cloud-computing services. This is coupled with higher overheads—the company expects its operating margin to contract by around 1% in FY2023, partly due to an additional $800 million in energy bills. “In our view, Microsoft’s results speak to a more challenging environment for the near future,” said Mark Murphy, Head of the U.S. Enterprise Software research team at J.P. Morgan. “This serves as an unwelcome reminder of how the tangled web of inflationary cost pressures can create a minefield by reaching into overlooked corners of a business.”

Tech supply chains

Even though global supply chain issues improved in the latter half of 2022, disruptions may continue to plague Big Tech companies in 2023. “For instance, while Amazon continues to benefit from high in-stock levels and faster delivery speeds, it is seeing some operational challenges around the supply of delivery drivers and higher labor costs,” said Anmuth.

Apple is also experiencing supply chain woes. In recent months, its key assembly plant in Zhengzhou, China—which is responsible for most of the world’s iPhone Pro supply—has been affected by COVID lockdowns and worker unrest. As a result, the company is expected to face a production shortfall of close to 6 million iPhone Pro units.

“The ongoing challenges around delays in returning to a normal level of production at the Zhengzhou facility could limit the pace with which supply-demand equilibrium can be reached in the coming months,” noted Chatterjee. However, supply appears to have rebounded from trough levels, with lead times moderating across most regions. “We expect a portion of the shipment shortfall in the December quarter to be made up in the March quarter. Overall, we forecast total iPhone volumes to track around 237 million in the 2023 financial year, which implies a decline of 4% year-on-year,” added Chatterjee.

What is the future of Big Tech in 2023?

Overall, Big Tech faces myriad challenges in 2023, including macro pressures, increased competition, supply chain woes and bloated cost structures. However, every cloud has a silver lining: Companies are now rethinking their business strategies and this could pave the way for a more sustainable era for Big Tech.

This includes leaning into a smaller number of high-priority growth areas. For instance, Amazon’s Prime offering and flexibility in pushing first-party versus third-party inventory will serve as major advantages for its retail business in 2023 and its multi-year head start in cloud computing will cement AWS as a global market leader. Alphabet will seek to diversify its revenue streams by developing its non-ad businesses, such as Google Cloud. As for Meta, the company is expected to remain focused on its new AI discovery engine, its ads and business platforms, and its multi-year transition to the metaverse.

“Overall, key opportunities for Big Tech in 2023 include rightsizing cost structures through headcount reduction and greater operating discipline, increasing focus on profits and cash flow, leaning responsibly into new growth drivers and gaining market share during this tough macro period,” observed Anmuth. “Expectations have become more reasonable, and companies should lap some of the pressures felt in 2022.”