Fading Cloud Cover Spells Trouble for Big Tech Earnings

The recent results from big tech companies have exacerbated worries that the surge in cloud services is beginning to wane, curtailing a valuable source of income as other areas of their businesses face an economic slowdown. This has led to a shift towards artificial intelligence as the new engine for growth.

The earnings reports from Amazon and Microsoft, who collectively lead the cloud market, indicated that growth in the cloud business was at its lowest since they started reporting the metric in 2015 and was expected to decelerate further.

Alphabet’s Google Cloud showed the lowest growth rate of 32% since the company started reporting it in 2019, making it the smallest cloud business among the three. This decrease in growth is due to the shift to post-pandemic frugality by corporate customers who have seen their budgets squeezed by high inflation and rising interest rates.

Analysts at Bernstein noted that investors are now questioning the cyclicality of the cloud business, which was once thought to be a stable source of revenue in the tech industry. On the other hand, Microsoft’s Azure cloud-computing business grew by around 50% each quarter in 2020, while market leader Amazon Web Services (AWS) reported a 30% increase in sales during the same period.

However, growth at AWS has slowed to a record low of 20% in the last three months of 2022, bringing in $21.4 billion, slightly missing analysts’ estimates of $22.03 billion, as per Refinitiv data.

Microsoft’s revenue in the intelligent cloud segment, which includes Azure, increased by 18% and exceeded expectations for the October to December period. However, the company’s current quarter forecast of $21.7 billion to $22 billion fell below the predicted $22.14 billion.

Andrew Lipsman, a principal analyst at Insider Intelligence, stated that Amazon’s deceleration in its AWS business was worse than anticipated and therefore, the company cannot rely on the unit’s operating profits as much in the upcoming quarters.

On Thursday, Amazon’s finance chief, Brian Olsavsky, mentioned that the company predicts slower growth rates for its cloud sector in the next few quarters, echoing Microsoft’s announcement from last week that the growth rate in Azure will decrease by 4-5 basis points in the quarter ending March.

James Cordwell, an analyst at Atlantic Equities, explained that the rapid migration of workloads to the cloud over the past two years has likely resulted in inefficiencies in cloud spending and there is now a shift towards greater efficiency.


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