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Cloud computing is a driving force in its own right among the megatrends driving the technology industry. Over the years, the cloud has bloated his Amazon, Microsoft, and Google, delivered lucrative service revenues, and helped grow countless software and computer makers and other technology companies.
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But get your umbrella out. The clouds have grown like a storm as the details of our third quarter earnings have become too clear.
Amazon Web Services underperformed the mark on both earnings and profits, report says Amazon.co.jp (AMZN) has frozen hiring in its cloud computing unit.Azure cloud business in microsoft (MSFT) announced an unexpected slowdown in cloud growth.as for alphabet’s (GOOGL) Google’s cloud business outperformed expectations, but Oppenheimer analyst Tim Horan said in a note to clients that there was “no prospect for meaningful earnings.”
So far, these big tech stocks are driving double-digit cloud revenue. But given economic trends, that may not last long.
Many economists expect the US economy to slow amid the Federal Reserve rate hike. The inflation outlook is important.
The report is important because these three cloud titans have become major sales channels for many software companies, supporting the tech industry with huge capital expenditures. This has benefited companies ranging from semiconductor manufacturers to internet companies.
Oppenheimer’s Horan said in a note, “While cloud providers remain very bullish on long-term trends, investors are surprised at how economically sensitive the sector is.” Sales cycles are getting longer and customers are looking to reduce their cloud spend through efficiencies.”
“Despite the slowdown, cloud is now a $160+ billion industry. But given that this is the first real cloud recession, investors will be concerned. It makes forecasting difficult.”
Long-term outlook for cloud computing
Dell’Oro Group expects capital spending on Internet data centers by the three cloud computing giants to grow 25% to $74 billion in 2022.
In 2023, however, spending on warehouse-sized data centers crammed with computer servers and data storage equipment is expected to slow. Dell’Oro estimates growth at just 7%. This makes the market up to $79 billion. This is bad news for semiconductor companies. NVIDIA (NVDA), manufacturers of networking equipment, and other companies in the cloud computing ecosystem. NVDA’s stock is down 49% in 2022.
Some analysts still see bright lights at the end of the tunnel for tech stock giants Amazon, Microsoft and Google.
Wedbush analyst Daniel Ives told Investor’s Business Daily: “This macro slowdown will clearly affect all aspects of technology spending over the next 12 to 18 months. We are not immune to the macro dark backdrop we have seen in the weekly earnings season.” on mail.
“That said, we estimate that 45% of workloads have migrated to the cloud globally, and[that share]is poised to reach 70% in a massive $1 trillion shift by 2025. Enterprises will move aggressively to the cloud, but we don’t think this is close, and the tenure will take that broader thesis off course,” Ives said.
He added: IBM (IBM) and Oracle (ORCL) will benefit from this cloud shift in the coming years and be able to weather this Category 5 economic storm. “
Are the best days of cloud computing over?
In other words, businesses are still planning to move workloads to the cloud, but the brakes may hit a bit soon.
CFOs know their technology budgets, so moving away from on-demand cloud services is a quick way to cut costs.
One of the reasons cloud computing has grown is that businesses can dial up on-demand services as needed. It happened during the coronavirus pandemic. Conversely, companies can also pull the plug.
Businesses are tightening their belts in preparation for a potential downturn, which may be holding back new projects. But in the long term, there are still reasons to move to the cloud.
Many companies are pursuing “digital transformation”. It’s a buzzword for various projects. Using software, companies are automating business processes and converting paperwork into electronic records.
Financial services companies are overhauling how they register new customers and collect sales data for analytics. Healthcare companies can manage appointment scheduling and automate patient record keeping. During the coronavirus pandemic, the company has rushed to deploy customer-facing technologies such as chatbots on his website.
Next Generation Cloud: Edge Computing
Bank of America expects a boost from next-generation cloud services for “edge computing.”
“Despite the slowdown, we believe the industry remains attractive compared to other tech sectors,” BofA analyst Justin Post said in a report.
Edge computing puts data processing, storage, and networking closer to the sensors. It’s also where other data originates near the “edge” of the network. It could be a hospital, factory, transportation hub, or retail store. The goal is to process and analyze data locally in real time.
Amazon, Microsoft, and Google are “treating the edge as an extension of the public cloud,” says the BofA report.All the big cloud computing companies are partnering with telcos AT&T (T), verizon (VZ) and T-Mobile US (TMUS).
It aims to incorporate cloud services into 5G wireless networks. “Telcos are leveraging hyperscale his cloud to launch their own edge computing business,” BofA said. TMUS stock price is up 29% in 2022.
BMO Capital Markets analyst Keith Buckman says investors should reset expectations as the coronavirus pandemic eases. Demand for cloud services surged as companies switched to working from home. Online shopping has boomed. Consumers also turned to Internet videos and online games for entertainment.
“We believe that COVID-19 and the requirements of hybrid work have exposed weaknesses in existing on-premises IT capabilities, prompting many organizations to accelerate their move to the cloud,” Buckman said in a note. “Cloud spending in the category remains healthy, but growth has slowed in the last few quarters. We believe that not only are the economic forces at work, but the pace of cloud migration has slowed post-corona.” .”
Cloud Computing Market Forecast
Market research firm Gartner updated its global cloud computing growth forecast on October 31st. The new forecasts were finalized before Amazon, Microsoft and Google announced their third-quarter earnings, said a Gartner spokesperson. AMZN stock price he dropped 48% in 2022.
Gartner forecasts that global end-user spending on public cloud services will grow 20.7% to $591.8 billion in 2023. This is up from his 18.8% growth in 2022.
In a news release, Gartner analyst Sid Nag warns:
It’s called the “public” cloud market because technology stocks rent servers and data storage. Cloud giants provide processing power and data storage to business customers on an hourly, weekly, monthly or yearly basis. Cloud companies are also pushing new consumption-based services.
AWS, Microsoft’s Azure, and Google’s cloud computing units are all growing faster than the industry average. Still, AWS and Microsoft’s Azure are slowing down. This is probably due to size and economy.
AMZN Stocks: Cloud Growth Slowed in Q3
AWS revenue was $20.5 billion in the third quarter. That’s a 28% year-over-year increase, but he’s 2% below analyst estimates of $21 billion. Growth slowed from 33% in the June quarter and 37% in the March quarter.
AWS earnings rose 11% to $5.4 billion, below AMZN equity analyst estimates of $6.1 billion. Amazon pointed to wage inflation and rising energy costs.
Youssef Squali, an Amazon equity analyst at Truist Securities, said in a report, “Amazon noted that AWS customers are focused on cost control and is working to help customers optimize costs. “The company has also seen slowing growth in certain industries (financial services, mortgages, crypto sectors).”
At Microsoft, “intelligent cloud” revenue increased 24% to $25.7 billion in the company’s first quarter. This includes Azure growing his 35% to $14.4 billion. Excluding exchange-rate effects, Azure’s revenue rose 42%, beating MSFT equity analyst forecasts by 1% and slowing from his 46% growth in the June quarter.
Microsoft led “constant currency” growth of about 37% in the December quarter.
Alex Zukin, MSFT Equity Analyst at Wolfe Research, said in a note: “
MSFT’s stock is down 33% in 2022.
Google Cloud beats forecasts, but remains unprofitable
Meanwhile, Google’s cloud computing revenue grew 38% to $6.28 billion. That was up 2% from the previous quarter and 4% higher than GOOGL equity analyst estimates.
However, the company reported an operating loss of $644 million in its cloud business.
Oppenheimer’s Horan estimates AWS will generate $13.9 billion in free cash flow in 2022. GOOGL’s stock price plunged nearly 40% in 2022.
Analysts say Google has aggressively priced its cloud services in an attempt to grab market share from the larger AWS and Microsoft’s Azure. It also increased hiring and spending on data centers. Also, the cybersecurity firm Mandiant, which he acquired for $5.4 billion.
Tech stocks and long-term ambitions
Deutsche Bank analyst Brad Zelnick remains optimistic about the cloud computing business.
“While the adoption of new workloads in the cloud has temporarily slowed, it is important that organizations’ long-term cloud ambitions remain unchanged,” he said in a note. “The short-term forces of optimization can mask what we believe to be very supportive underlying trends. I’m sure there are.”
Some software growth companies are getting many new customers from cloud computing platforms.
“Cloud consumption” software companies, etc. snowflake (snow), data dog (DDOG) and Confluent (CFLT) is one of the companies that could be hit if public cloud computing growth slows from the December quarter through 2023, according to a Morgan Stanley report. SNOW’s stock price fell 62% in 2022, despite a significant increase in earnings.
DDOG shares rose on better-than-expected third-quarter earnings.
In terms of exposure, RBC Capital not only Datadog, Fastly (FSLY), MongoDB (MDB) and Twilio (TWLO).
Follow Reinhard Krause on Twitter @reinhardtk_tech See the latest in 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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