Apple, Amazon Q3 earnings prove it's a bad time to be in the 'stuff' business

On Thursday, tech giants and investors alike discovered it’s a bad time to be in the “stuff” business.

A shortage of semiconductors—vital to powering the brains of most stuff—a spike in shipping costs—essential for transporting stuff overseas—and a dearth of truck drivers—who ferry stuff from ports to warehouses and stores—all converged to drag earnings at Apple and Amazon, two of the largest makers and sellers of stuff, way below analyst expectations in the three months to September.

Amazon reported revenue growth of 15% in its third quarter, down from 37% growth a year ago. Apple, meanwhile, reported 29% growth in its fiscal fourth quarter, hitting $83.4 billion in sales but still coming in at $1 billion below analysts’ expectations.

Said Apple CEO Tim Cook: “Larger than expected supply chain constraints” cost the company roughly $6 billion in expected revenue this past quarter. The iPhone, iPad, and Mac maker has been hit especially hard by the global chip shortage that has roiled tech manufacturers since January.

Meanwhile Amazon CEO Andy Jassy warned in the company’s earnings report that “labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs” would cost the company “several billion dollars” to mitigate in the coming quarter.

Investors took the news badly, shredding Apple shares 3% in premarket trading and dragging Amazon down 4.8%, eliminating some $170 billion in combined market cap from the two titans. Furthermore, the two behemoths warned of uncertainty ahead for the crucial Christmas period, underscoring what shipping giant Kuehne + Nagel told investors last week—that the supply chain issue won’t improve until some time in 2022.

On the flip side, Google parent Alphabet and Microsoft—which mostly sell software and services, rather than stuff—had stellar quarters, both beating analyst expectations for the three months. On Tuesday, Microsoft reported a 22% jump in revenue compared with the same quarter last year. The same day, Alphabet announced a 14% surge in revenues, driven mostly by advertising.

Microsoft’s shares rallied 4% on Wednesday, and Alphabet’s jumped 6%, driving the company’s market cap to a record high of over $2 trillion. (In fact, Microsoft is now poised to overtake Apple as the world’s most valuable company after the iPhone maker’s latest tumble.) If there’s a lesson to learn from the recent earnings season, it’s that software is far more resilient to supply chain disruptions than stuff is.

Amazon might be able to lean on its own services unit to unhook itself from the supply chain constraints holding back revenue growth now. Morningstar’s Dan Romanoff says the e-commerce group “remains well positioned to prosper from the secular shift toward e-commerce and the public cloud over the next decade.”

But Romanoff says supply chain snags and rising labor costs will continue to “reset” the e-commerce group’s core business “through the next several quarters.” Morningstar analysts expect Apple’s supply chain woes will last well into 2022 as well.