By Aditya Soni and Yuvraj Malik
Results from Big Tech confirmed worries that the rise in cloud services is slowing, limiting a lucrative source of profit when the companies’ other industries have been hurt by the slowing economy, and motivating a bet on artificial intelligence as the next growth driver.
Earnings from Amazon.com Inc (AMZN.O) and Microsoft Corp (MSFT.O), which jointly control the majority of the cloud industry, revealed that business growth had reached its lowest level since they began tracking it in 2015 and was on course to fall much more.
The smallest of the three cloud providers, Alphabet Inc (GOOGL.O), reported that Google Cloud climbed 32%, the slowest increase since the company started publishing the metric in 2019.
The bad results reflect a change in corporate customers’ spending habits brought on by the pandemic, since their budgets have been strained in recent months due to high inflation and rising interest rates.
Investors are beginning to doubt the cyclicality of the (cloud) sector, which was formerly considered to be the most defensive revenue stream in technology, according to Bernstein analysts.
For years, Microsoft and Amazon relied on the revenue from cloud services.
When the epidemic pushed individuals to work and study at home, the Windows manufacturer saw growth of about 50% in its Azure cloud-computing business during each quarter of 2020. Amazon Web Services (AWS), the industry leader, recorded a 30% increase in sales during the same time period.
But times have changed.
According to Refinitiv statistics, growth at AWS fell to a record low of 20% in the final quarter of 2022, reaching $21.4 billion, just missing analysts’ projections of $22.03 billion.
Microsoft’s sales in its so-called intelligent cloud division, which includes Azure, increased 18% from October to December, above estimates. However, its $21.7 billion to $22 billion prediction for the current quarter fell short of estimates of $22.14 billion.
According to Andrew Lipsman, chief analyst at Insider Intelligence, “The downturn in AWS was even worse than projected and means Amazon can’t rely on that business units’ operating profitability as much in coming quarters.”
Brian Olsavsky, the head of finance at Amazon, stated on Thursday that the business anticipates reduced cloud growth rates for the upcoming quarters. It was similar to what Microsoft said last week when it predicted a 4-5 basis point slowdown in growth for its Azure cloud computing division in the March quarter.
According to James Cordwell, analyst at Atlantic Equities, “You’ve just come off two years of rapid migration of workloads to the cloud, there’s definitely a lot of inefficiencies in cloud spending, and now there is a shifting focus to higher efficiency.”
SILVER LINING, AI
However, analysts warned that a hypothetical AI boom following the ChatGPT phenomenon might increase demand for cloud services once more. Applications utilising AI demand a lot of computer power, which is advantageous for businesses whose services support the technology.
Analysts stated that Microsoft is well-positioned as an investor and a partner in OpenAI, but any gains might not immediately transfer into profits.
“It will take some time for those (AI) improvements and the demand for associated cloud services to manifest. Over the upcoming few quarters, they are unlikely to counteract the existing headwinds in the enterprise sector “said Lipsman.
By Aditya Soni and Yuvraj Malik