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Co-authored by Tiyashi Datta, Jane Lanhee Lee, and Chavi Mehta
In other words, Reuters has some breaking news.
U.S. IT giants Amazon.com, Microsoft, and Intel all said this week that customers were cutting back on cloud and data center investment, which might be a precursor to a recession.
Even as individuals worked and studied from home throughout the epidemic, cloud services remained one of the largest and most reliable drivers of growth for some of the major software businesses.
Now that corporations are dealing with increased costs due to skyrocketing inflation and interest rate rises have reduced consumer demand, investors are trying to determine if there is a surplus in a capacity that will lead to investment cuts. Particularly detrimental has been the strength of the dollar.
Amazon Web Services (AWS) growth, the company’s profitable cloud arm serving companies, has been trending downward over the previous four quarters after being adjusted for fluctuations in foreign exchange rates.
The business’s net sales growth slowed to 28% from 39% a year earlier in the July-September period, the worst showing since the fourth quarter of 2020. They were under the average projection by 31%.
After the closing bell on Thursday, Amazon’s stock dropped 12% after the company announced slower-than-expected Christmas sales growth, wiping off around $140 billion in market value and ending a week of poor reports from global IT companies.
According to Andrew Lipsman, chief analyst at Insider Intelligence, “the AWS slowdown is a clear indicator that businesses are trying to slash expenditures, thus this will likely put more of a stress on Amazon’s bottom line in the coming quarters.”
According to Visible Alpha, Microsoft’s cloud service Azure, which has accelerated revenue growth at the software giant for years, saw growth of 35% in the July-September quarter, down from 50% the year before.
Another decline was predicted for the crucial Christmas quarter.
The 38% quarterly revenue growth of Alphabet’s Google Cloud exceeded projections. This a bright spot in an otherwise dismal quarter, but still well below the 45% year-over-year expansion the business reported. Read also: The Biggest Tech Firms Are Flashing Red Lights About the Economy
STAGGERING EUROPE AND CHINA
Matt Wegner, a research specialist at YipitData, made the following generalizations about the cloud deployments of Amazon Web Services, Microsoft, and Alphabet (Google’s parent company): “This (decline) initially became noticeable in April and has persisted until the present. The European continent is a major vulnerability.”
High energy costs and interest rate hikes have contributed to near 10% inflation in the Eurozone, and ECB President Christine Lagarde warned on Thursday that this increases the possibility of economic recession.
Intel, which produces processors for clients in data centers including AWS, reported a 27% drop in sales and an almost complete loss of profit in this business during the third quarter. Intel CEO Pat Gelsinger blamed weak demand from Chinese enterprise clients for some of the company’s troubles.
Given the continued economic uncertainties that Gelsinger expects to persist into next year and the length of time it is taking to ramp up sales into data centers, the business has reduced its profit and revenue projection for the year.
Budget cuts in the cloud computing industry might be a warning sign that corporations are prioritizing cost over other factors as they prepare for economic hardship.
According to Dean McCarron, head of Mercury Research, which monitors chipmakers, businesses typically construct more cloud and data center capacity than is required and then wait for it to be absorbed. Read more: After a Drop in Us Technology Stocks, Dogecoin and Cardano Have Become Drags on the Market
McCarron explained that progress has slowed since 2021 when the decision to “build more” was made. Though there are wider macroeconomic worries about how much improvement we could see in the next growth cycle, he said that he believes Intel’s data center issue is nearing a bottom.
(Tiyashi Datta and Chavi Mehta in Bengaluru; Jeffrey Dastin in Palo Alto and Jane Lanhee Lee in Oakland, California; Sayantani Ghosh in writing; Richard Pullin in editing) Read also: Ask Amy: Ex Is Upset Over Being Left Out of Family Wedding
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