The ‘first true cloud computing stagnation’ arrives
Among the major trends driving the technology industry, cloud computing has been a force in its own right. Over the years, the cloud has fattened Amazon, Microsoft, and Google with highly profitable services revenue, and fueled growth in countless software and computer makers, and other technology companies.
But get out of your umbrellas. The cloud became a storm, as the third-quarter earnings details perfectly explained.
As for Amazon Web Services, it failed to hit the target in terms of both profits and revenue, parent reports say Amazon.com (AMZN) has suspended recruitment in the cloud computing unit. Azure’s cloud business Microsoft (MSFT) Cloud growth has slowed unexpectedly. As for the the alphabet’Google’s (GOOGL) cloud business came in ahead of expectations, but Oppenheimer analyst Tim Horan said in a note to clients that he “has no field of vision to make meaningful profits.”
So far, these big-cap tech stocks are still pushing their cloud sales well into double-digit territory. But this may not last long given the economic trends.
Many economists expect the US economy to slow as the Federal Reserve raises interest rates. Inflation expectations are key.
The reports are significant because the three cloud giants have become a major sales channel for many software companies, while supporting the tech industry with massive capital spending. This has benefited players ranging from semiconductor makers to Internet companies.
“Cloud providers remain very optimistic about long-term trends, but investors have been surprised by how economically sensitive the sector is,” Oppenheimer Horan said in his note. “Cloud sales cycles have been long and customers are looking to reduce cloud spending through increased efficiency.”
“Despite the slowdown, cloud is now a $160 billion industry. But investors will be concerned as this is the cloud’s first true recession, making predictions difficult,” he added.
Long-term view of cloud computing
In 2022, capital spending on Internet data centers by three large cloud computing stocks will jump 25% to $74 billion, Dell’Oro Group estimates.
But in 2023, spending on data centers is expected to slow to the size of warehouses full of computer servers and data storage equipment. Dell’Oro is only putting growth at 7%, which would take the market to $79 billion. This is bad news for semiconductor companies like nvidia (NVDA), network equipment makers and other companies in the cloud computing ecosystem. NVDA stock is down 49% in 2022.
Some analysts still see a bright light at the end of the tunnel for tech giants Amazon, Microsoft and Google.
“This overall slowdown will obviously affect all aspects of technology spending over the next 12 to 18 months. Cloud spending is not immune to the overall dark background as seen during earnings season over the past few weeks,” Wedbush analyst Daniel Ives told . Investor Business Daily. in a letter.
“However, we estimate that 45% of workloads have moved to the cloud globally and (the share) is poised to reach 70% by 2025 in a massive $1 trillion shift. Companies are going to be pushing hard into the cloud and we don’t think that’s close — The term of separation takes this broader thesis off course.”
He added, “The near-term environment is more of a quick stumble rather than a brick wall on the cloud transformation underway. Microsoft, Amazon, Google, IBM (IBM) and inspiration (ORCL) will be one of the clear beneficiaries of this cloud transformation over the coming years and weather this Category 5 economic storm.”
The best days of cloud computing?
In other words, companies are still planning to shift their workloads to the cloud, but it may squeeze a bit in the near term.
As CFOs study technology budgets, opting out of on-demand cloud services is a quick way to cut costs.
One of the reasons for the growth of cloud computing is that companies can order on-demand services as needed. It happened during the coronavirus pandemic. The flip side is that companies can turn off the tap as well.
Companies may be holding back on new projects as they tighten their belts on a possible recession. But in the long run, they still have reasons to move to the cloud.
Many seek “digital transformation,” a buzzword that describes a wide variety of projects. Using software, companies automate business processes and convert paperwork into electronic records.
The financial services company might fix how new customers are registered or collect sales data for analysis. A healthcare company can manage appointment scheduling or automate patient record keeping. During the coronavirus pandemic, companies have scrambled to deploy customer-facing technology, such as chatbots, on websites.
The next generation of the cloud: edge computing
Bank of America expects support from next-generation cloud services that meet the needs of “edge computing.”
“Despite the slowdown, we continue to view the industry as attractive compared to other technology sectors,” Bank of America analyst Justin Post said in a note.
Edge computing deploys data processing, storage, and networking near sensors. It is also the source of the other data, near the “edge” of the network. It could be in a hospital, factory, transportation hub, or retail store. The goal is to process and analyze data locally in real time.
A report by Bank of America said that Amazon, Microsoft and Google are “treating the edge as an extension of their public cloud”. All the giant cloud computing companies have a partnership with telecom companies AT&T (T), Verizon (VZ) and T-Mobile United States (TMUS).
Their goal is to include their cloud services in 5G wireless networks. “Telecom companies are taking advantage of the ultrawide cloud to launch their edge computing businesses,” BofA said. TMUS stock is up 29% in 2022.
At BMO Capital Markets, analyst Keith Bachman says investors need to reset their expectations as the coronavirus pandemic subsides. The company’s shift to working from home has increased the demand for cloud services. Online shopping boomed. Consumers are turning to online video and online games for entertainment.
“We believe that many organizations have accelerated the journey to the cloud as hybrid business requirements and the Covid virus have exposed weaknesses in their in-house IT capabilities,” Backman said in a note. “While spending remains healthy in the cloud category, growth has slowed over the past few quarters. We believe economic forces are operating as well as a slower pace in post-Covid cloud migrations.”
Cloud Computing Market Forecast
Market research firm Gartner updated its forecast for global cloud computing growth on October 31. The new forecast was completed before third-quarter earnings were announced by Amazon, Microsoft and Google, a Gartner spokesperson said. AMZN stock is down 48% in 2022.
Gartner predicts end-user spending worldwide on public cloud services will grow 20.7% in 2023 to $591.8 billion. This is up from 18.8% growth in 2022.
In a press release, Gartner analyst Sid Nag warned: “Organizations can only spend what they have. Cloud spending could decline if overall IT budgets shrink, given that the cloud still accounts for the bulk of IT spending and budget-proportioned growth.” “
It’s called the “public” cloud market because tech stocks lease servers and data storage. Cloud giants provide business customers with the power of processing and storing data by the hour, week, month or year. Also, cloud companies are pushing new consumption-based services.
AWS, Microsoft’s Azure, and Google’s cloud computing unit are growing at a rate above the industry average. However, AWS and Microsoft’s Azure are slowing down, possibly due to scale as well as economy.
AMZN stock: Cloud growth slows in the third quarter
AWS third-quarter revenue was $20.5 billion. That’s a 28% increase from the previous year, but 2% below analysts’ estimates of $21 billion. Growth slowed from 33% in the June quarter and 37% in the March quarter.
AWS earnings of $5.4 billion, up 11%, missed the $6.1 billion estimate by AMZN stock analysts. Amazon cited inflated wages and rising energy costs.
“Amazon has noticed that it has seen a slight increase in AWS customers focused on controlling costs and working to help customers optimize cost,” Joseph Scully, Amazon equity analyst at Trust Securities, said in a report. “The company is also experiencing slower growth from some industries (financial services, mortgage and cryptocurrency sectors).”
At Microsoft, “Intelligent Cloud” revenue increased 24% to $25.7 billion during the company’s fiscal first quarter, including Azure growth of 35% to $14.4 billion. Excluding the impact of currency exchange rates, Azure revenue is up 42%, MSFT stock analyst estimates are missing 1% and the June quarter growth of 46% slowed.
Microsoft has directed “constant currency” growth of about 37% in the December quarter.
At Wolfe Research, MSFT equity analyst Alex Zukin said in his note: “The damage in Microsoft’s case came from another Azure bug in the quarter, but the biggest surprise was the 37% evidence. This is the biggest sequential growth slowdown ever.”
MSFT stock is down 33% in 2022.
Google Cloud Beats Forecasts But It’s Still Not Profitable
Meanwhile, Google’s cloud computing revenue rose 38% to $6.28 billion. That represented a 2% increase from the previous quarter and exceeded GOOGL stock analysts’ estimates by 4%.
But the company reported an operating loss of $644 million for its cloud business, compared to $699 million a year earlier.
Oppenheimer Horan estimates that AWS will generate $13.9 billion in free cash flow in 2022. But he sees Google’s cloud unit as having $10.6 billion in negative free cash flow. GOOGL stock is down nearly 40% in 2022.
Aiming to capture a share of larger AWS and Microsoft’s Azure, Google has priced its cloud services significantly, analysts say. It also boosted hiring and spending on data centers. It acquired cybersecurity firm Mandiant for $5.4 billion.
Technical stocks and long-term ambitions
At Deutsche Bank, analyst Brad Zelnick remains optimistic about the cloud computing business.
“We see a temporary slowdown in bringing new workloads to the cloud, although this is not a change in the long-term ambitions of enterprises,” he said in a note. “Near-term forces of improvement could mask what we believe are still very supportive underlying trends. We remain confident that we are still in the early stages of a generational transition to the cloud.”
Some software development companies are now attracting many new customers from cloud computing platforms.
Software companies ‘cloud consumption’ such as snowflake (snow) , datadog (DDOG) and Community (CFLT) is among those that could suffer if public cloud computing growth slows in the December quarter through 2023, according to a Morgan Stanley report. Snow’s stock is down 62% in 2022, despite strong revenue growth.
DDOG stock rose thanks to better-than-expected third-quarter earnings.
In terms of exposure, RBC Capital referred to Datadog as well quickly (FSLY), MongoDB (MDB) and Twilio (TWLO).
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