© Reuters. FILE PHOTO: 3D printed clouds and figurines are seen in front of the AWS (Amazon Web Service) cloud service logo in this illustration taken February 8, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
By Aditya Soni and Yuvraj Malik
(Reuters) – Big Tech results reinforced concerns a boom in cloud services is easing, limiting a lucrative source of profit when a slowing economy has hit the companies’ other businesses and prompting a bet on artificial intelligence as the next growth driver.
Earnings from Amazon.com Inc (NASDAQ:) and Microsoft Corp (NASDAQ:) – which together dominate the cloud market – showed growth in the business was at its lowest since they started breaking out the metric in 2015 and was on track to slow further.
Alphabet (NASDAQ:) Inc, which has the smallest cloud business among the three, said Google Cloud grew 32%, the slowest rise since the company began reporting the measure in 2019.
The poor results reflect a shift to post-pandemic frugality by corporate customers whose budgets have been squeezed in the past year by high inflation and rising interest rates.
“Once thought as the most defensive revenue stream in tech, we are seeing investors questioning the cyclicality for the (cloud) business,” analysts at Bernstein said.
Cloud services had long been a reliable source of earnings for Microsoft and Amazon.
The Windows maker posted growth of around 50% in its Azure cloud-computing business for each quarter of calendar 2020, when the pandemic forced people to work and study at home. Meanwhile, market leader Amazon Web Services (AWS) reported sales jump of about 30% during the same period.
Times, though, have changed.
Growth at AWS slowed to a record low of 20% in the last three months of 2022 to $21.4 billion, slightly missing analysts’ estimates of $22.03 billion, according to Refinitiv data.
Microsoft’s revenue in its so-called intelligent cloud business that includes Azure rose 18% to beat expectations for October to December. But its current-quarter forecast of $21.7 billion to $22 billion was below estimates of $22.14 billion.
“The deceleration in AWS was even worse than expected and means Amazon can’t rely on that business units’ operating profits as much in coming quarters,” said Andrew Lipsman, principal analyst at Insider Intelligence.
Amazon finance chief Brian Olsavsky said on Thursday that the company expects slower cloud growth rates for the next few quarters. That echoed Microsoft, which said last week that growth in its Azure cloud-computing business would slow by 4-5 basis points in the March quarter.
“You’ve just come off two years of rapid movement of workloads to the cloud, there’s probably a lot of inefficiency in cloud spending and now there is a shifting focus to greater efficiency,” said James Cordwell, analyst at Atlantic Equities.
AI SILVER LINING
A potential boom in AI after the viral success of OpenAI’s ChatGPT could boost demand for cloud services again though, analysts said. AI applications require massive computing power, a boon for companies whose services help run the technology.
As an investor and partner of OpenAI, Microsoft looks well poised, analysts said, but any gains may take time to translate into profits.
“Those (AI) advancements and demand for related cloud services will take time to materialize. They’re not likely to offset current headwinds in the enterprise market over the next few quarters,” Lipsman said.