With earnings season far from over, enough tech companies have reported to give an idea of ​​how sales are developing in many parts of the industry.

Here are some of the things that have stood out as tech companies large and small have reported in recent weeks:

1. Demand for chips is falling in some markets, but holding up well in others

Companies such as Micron Technology (MU) and Taiwan Semiconductor (TSM) have made it clear – in case all the other evidence isn’t enough – that consumer demand for PCs, smartphones and other tech/electronic products has softened. , both due to macroeconomic pressures and the shift in consumer spending away from goods towards services (all of which weighed particularly heavily on demand for low-end products). More recently, weak earnings/guidance from Seagate (STX) and the warning from Corsair Gaming (CRSR) signaled weakening demand for chips and components for consumer technology hardware.

And in some non-consumer markets, OEMs have started to reduce their chip/component inventories – often after building them up over the past two years amid shortages – even though end demand is still quite healthy. Seagate said on Thursday that many customers are about to run down hard drive inventory (Chinese customers in particular). And on Friday, Morgan Stanley’s Joseph Moore reported (while downgrading Micron to an “underweight” rating) that Micron customers are “taking a more aggressive approach to inventory management” after Micron said on his call. to June 30 results that its own stocks would increase in the near term.

On the other hand, Micron and Taiwan Semi reported that they still see good end demand from data centers and automotive end markets. And while Micron and Seagate issued weak quarterly sales guidance, Taiwan Semi issued a better-than-consensus quarterly guidance and raised its full-year outlook.

In a chip demand environment like this, I think it pays to be selective about which chip vendors you invest in. t the sale of commodities subject to steep price declines when demand begins to fall short of supply — seems relatively well positioned.

2. Chip Equipment Demand Still Doesn’t Look Bad Overall

Chip equipment stocks plunged after Micron’s June 30 earnings report, after the memory giant said (amid weakening demand for PC/smartphone memory) that it was reducing its investment plans for fiscal year 2023 (ends August 2023). But since then, the news flow for the group has been much healthier.

On its second-quarter earnings call, Taiwan Semi said it now expects its full-year investments to be near the bottom of a guidance range of $40 billion to $44 billion. (still well above 2021 investments of around $30 billion), but added that this is due to equipment supply constraints and indicated that he would also invest heavily in capital expenditure next year. Similarly, lithography equipment giant ASML (ASML) cut its full-year sales forecast due to delays in revenue recognition caused by supply constraints, but also reported strong growth in the order book and indicated that its capacity is largely reserved until 2023. that their second quarter sales are at the high end and above their previous guidance ranges.

Admittedly, BE Semiconductor (BESIY), a supplier of chip assembly equipment, issued a soft outlook for the third quarter. And it wouldn’t be surprising to see other memory makers, such as Samsung and SK Hynix, also signaling that they’re considering reducing their memory investments.

Nonetheless, demand for wafer fabrication equipment (WFE) among non-memory chipmakers still looks quite strong, driven by factors such as higher capital intensity for advanced manufacturing processes, catch-up spending on processes and mature efforts (helped by grants) to locate more chip production. And with many chip makers now sporting single-digit or double-digit P/Es, their stocks now arguably have a low bar to cross.

3. Software spending is down a bit

IBM’s software division (IBM) missed its second-quarter revenue consensus and (after factoring in a rise in the exchange rate the company expects this year) Big Blue lowered its revenue forecast. in dollars for the entire year. Meanwhile, SAP (SAP) effectively did the same by keeping its euro-based full-year revenue forecast unchanged and said on its call that its traditional software license sales were being stung. as macro uncertainty accelerates the long-term shift to cloud software spending.

It could be pointed out here that IBM is a long-time donor in software (among other things), and SAP’s comment doesn’t seem so bad for cloud/SaaS software pure-plays. But cloud customer survey software provider Qualtrics (XM) also lowered its annual guide, while mentioning during its call that it is seeing longer transaction cycles, and Bill McDermott, CEO of the software giant cloud computing service management ServiceNow (NOW), also suggested macroeconomic fears are affecting deal activity. And the comments from Qualtrics and ServiceNow are increasingly backed up by research and other information pointing to reduced software sales activity.

Software still takes the bulk of IT spending, and SaaS companies’ reliance on recurring revenue streams protects them in the event of a downturn (not to mention attractive to potential acquirers). But with an apparent slowdown in business activity – perhaps more outside of high priority areas such as security – further guidance/estimate cuts for the sector are likely on the way. And while some software companies are now arguably pricing in bad news, some still have high valuations.

4. Online Ad Spend Takes a Hit – Especially for More Discretionary Types of Ad Buys

Snap’s (SNAP) second-quarter shareholder letter — in which the company declined to provide third-quarter information and said its third-quarter revenue was flat year-to-date — has more than confirmed fears that digital advertising budgets will be cut as various companies tighten their belts. Twitter’s (TWTR) Q2 report, in which the company reported a $140 million shortfall and (citing its pending/disputed deal to be acquired by Elon Musk) declined to provide Q3 guidance. , hasn’t calmed investors’ nerves much either.

It should be noted that both Snap and Twitter are heavily exposed to brand ads and app install ads. The former has long been one of the first casualties when companies worry about macroeconomic conditions, and the latter is apparently stung by a mixture of macroeconomic pressures, changes to Apple’s User Tracking Policy (AAPL), and much more difficult financial conditions for many public and private technologies. companies.

Demand trends may not be enough also bad for some big players in online advertising. Last week, online advertising agency Tinuiti shared reasonably good second quarter data for its clients’ ad spend on Google (GOOGL), while reporting a significant drop in the annual growth rate of their ad spend. on Youtube. Nonetheless, at a time when many companies are keen to cut costs and a tight labor market often makes them reluctant to make significant layoffs, it’s easy to see many of them cutting advertising/marketing spend, at least for a while.

5. A strong dollar is a big headwind for American multinationals

This should come as no shock to anyone who has followed the performance of the dollar against currencies such as the euro and the yen. But still, some of the forex success stories leaked this earnings season are pretty mind-blowing.

The Forex was a 7 percentage point headwind for IBM’s second-quarter sales growth and a 4-point headwind for Netflix’s (NFLX) second-quarter growth. Additionally, the companies forecast forex headwinds of 8 and 7 points respectively for the third quarter.

Look for a number of other U.S. technology companies with significant international sales to report similar pressures on revenue due to a strong dollar.

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