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Wednesday, Dec. 14, 2022

Big Tech's pain doesn't end at midnight on New Year's Eve

The year is nearly over, and the last few days of 2022 can’t come soon enough for Big Tech. In the past 12 months, the industry went from having a sense of euphoria, with companies like Apple (AAPL) reporting record earnings, to doom and gloom, as firms like Meta (META) have been forced to layoff workers.

From supply-chain bottlenecks that have blunted Apple’s ability to meet iPhone demand and the Federal Trade Commission’s (FTC) attempt to block Microsoft’s (MSFT) $69 billion Activision Blizzard (ATVI) deal to Amazon’s (AMZN) job cuts, 2022 has been a difficult year for the tech industry.

“I think 2022 was a year of extremes for the tech business,” Bob O’Donnell, president and chief analyst at TECHnalysis Research, told Yahoo Finance. “We went from super high valuations of tech companies and, unfortunately, this sense of almost invulnerability at the beginning of the year, to almost the exact opposite by the end of the year when the realities of post-pandemic economics began to kick in.”

And it’s unlikely those trends will change anytime soon. That could mean further job losses and lower share prices for companies that once seemed untouchable.

It’s not just economic trouble, either. Big Tech companies continue to contend with antitrust investigations and lawsuits and a new threat to Section 230 of the Communications Decency Act, the liability shield that protects companies that host and moderate online user-generated content.

But 2023 won’t be a total loss. And the industry’s biggest names could pull things together by mid year, as macroeconomic headwinds could turn around.

New year, same problems

Mass layoffs at companies like Meta, Snap (SNAP), and HP (HPE) roiled the tech industry in 2022, and there’s likely still more pain ahead in the near term.

“I think in 2023 we're going to continue to see a little bit of resizing across a few organizations, but I think then things will settle out,” O’Donnell explained.

Companies across the tech sector have also implemented hiring freezes that will continue into the new year. In November, Amazon (AMZN), which culled 10,000 workers from its payrolls, announced it is pausing incremental corporate hires, a move it expects to last several months.

Beyond layoffs and hiring freezes, the slowdown in digital ad sales that has burned the likes of Google’s YouTube and Meta is also expected to continue into 2023. In its October earnings report, Google parent Alphabet reported YouTube ad sales that missed analysts’ expectations by a whopping $400 million.

Meta and Snap, meanwhile, are navigating both the slowdown in ad sales and the ongoing impact of Apple’s iOS privacy changes, which have handicapped those companies’ ability to track user activity across the web.

In Q3, Meta announced it is expecting fourth quarter revenue of between $30 billion and $32.5 billion. Wall Street was expecting $32.2 billion. All of this comes as Meta continues to plow billions of dollars into its metaverse efforts.

If that’s not enough, tech companies will also have to deal with antitrust investigations and the ongoing battle over Section 230 of the Communications Decency Act. Google is currently fighting a suit related to its search dominance, while Meta is squaring off against the FTC, which hopes to break up the social media behemoth.

Microsoft, meanwhile, is trying to buy Activision Blizzard for $69 billion, but it has to beat an FTC suit seeking to block the acquisition. The tech giant is still waiting on the E.U. and U.K.’s competition regulators to weigh in on the deal. We’ll likely hear more in early 2023.

Then there’s Section 230. In 2023, the Supreme Court will hear a challenge to the law, setting up its biggest test to-date.

The case, Gonzalez v. Google, has to do with whether Google’s YouTube can be held responsible for violating the Anti-Terrorism Act because its algorithm suggested user-generated terrorist videos to other users. The family of an American killed during a terror attack in France argues that Google should be deprived of Section 230 protections, because Google’s algorithm recommended videos that helped radicalize the terrorists who killed their daughter.

If the court finds in favor of Gonzalez, it could mean a complete overhaul of how and if tech companies use algorithms to recommend user-generated content.

“I think that is the biggest uncertainty of 2023,” NYU Stern School of Business Professor Vasant Dhar told Yahoo Finance. “The [Gonzalez v. Google] case is really important because it gets at the heart of the business model of social media platforms,” he added

There’s hope on the horizon

Despite all of the doom and gloom, there is some good news ahead for tech companies in 2023. According to Wedbush analyst Dan Ives, the onslaught of negative economic news should slow in the second half of the year. What’s more, software and cybersecurity should see solid growth in the new year.

“I think [tech] is as under-owned as we've seen [it] going back to 2009 in terms of stocks,” Ives said. “I think we're getting into the 7th and 8th inning of the tech pain. I think big cap tech—from Apple to Microsoft, to Meta and Google— 2023 is going to be a relatively strong year for those stocks.”

So while the tech industry might still be facing a difficult few months ahead, there’s at least a sense that the worst of the damage has already been done, and a turnaround is coming…eventually.

By Daniel Howley, tech editor at Yahoo Finance. Follow him @DanielHowley

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