Monitoring Desk
Big tech results lent credence to predictions that a surge in cloud services is slowing, reducing a lucrative source of profit at a time when the companies’ core operations have been impacted by a slowing economy and forcing a bet on artificial intelligence as the next growth driver.
Earnings from Amazon.com Inc and Microsoft Corp (MSFT.O), which jointly control most 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.
Alphabet Inc (GOOGL.O), the smallest of the three cloud companies, reported 32% growth in Google Cloud, the slowest rate since the company began reporting the measure 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.
Big Tech
Bernstein analysts claimed that investors are now doubting the cyclicality of the (cloud) business, which was long considered the most defensive revenue stream in tech. For years, Microsoft and Amazon relied on revenue from cloud services. When the epidemic caused people to work and study at home, the Windows maker saw growth of almost 50% in each quarter of calendar 2020. Meanwhile, market leader Amazon Web Services (AWS) recorded a 30% increase in sales during the same time period.
However, times have changed. According to Refinitiv data, in last three months, AWS growth fell to a record low of 20% of 2022, to $21.4 billion, narrowly missing analysts’ projections of $22.03 billion. Microsoft’s revenue in its so-called intelligent cloud business, which includes Azure, increased 18% from October to December, above expectations. However, its current-quarter prediction of $21.7 billion to $22 billion fell short of analyst expectations of $22.14 billion.
According to Amazon finance director Brian Olsavsky, the company forecasts slower cloud growth rates in the near term. 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, an analyst at Atlantic Equities, there are undoubtedly numerous inefficiencies in cloud spending after two years of swiftly moving workloads there, and the emphasis is now shifting to greater efficiency.
AI SILVER LINING
Analysts believe that a surge in AI following the viral success of OpenAI’s ChatGPT could increase demand for cloud services. AI applications necessitate vast processing capacity, which benefits corporations whose services support the technology. Analysts believe Microsoft is well positioned as an investor and partner in OpenAI, but any gains may take time to transfer into profits. According to Lipsman, AI developments and demand for related cloud services will take time to materialize. Over the upcoming quarters, they will not likely counteract the corporate sector’s current headwinds.
