The cloud boom has hit its stormiest moment yet, and it's costing investors billions

The cloud boom has hit its stormiest moment yet, and it’s costing investors billions

The cloud boom has finally reached an altitude of rest, but Wall Street is doing anything but rest. Inc. AMZN,
the original cloud computing pioneer, confirmed Thursday which rivals Microsoft Corp. MSFT,
and Alphabet Inc. GOOGL,

suggested with their earnings reports earlier in the week: Cloud computing growth has finally plateaued, as companies around the world cut costs to deal with the slowing economy. Amazon Web Services, the backbone of Amazon’s earnings, saw revenue hit its slowest growth ever, and executives said it would slow even further.

“At the end of the quarter, we were pretty much in the 20% mid-growth range, so defer that forecast to Q4 – we don’t know how that’s going to play out, but that’s generally our assumption,” the CEO said. CFO of Amazon. Officer Brian Olsavsky told analysts after reporting quarterly growth of 27.5%.

It was a shocking downturn for AWS, which saw growth of 33% in the second quarter, 37% in the first, 37% in the fourth quarter of 2021 and 39% a year ago. That shouldn’t have been too big of a surprise though: smaller rivals reported similar slowdowns earlier in the week.

Microsoft’s Azure cloud business grew 35% in its first fiscal quarter, compared with 40% in the prior quarter and 50% in the prior year, and executives predicted another decline of five percentage points this quarter. Alphabet’s Google Cloud is also slowing, although that was the bright spot of double-digit growth in the disappointing quarter for the internet search and advertising giant. Google’s cloud services grew 37.6% in the third quarter, down from 35.6% in the second quarter, but down from 43.8% in the first quarter and 44.6% in the fourth quarter.

Regular readers of this column shouldn’t be surprised either, as we predicted three months ago (perhaps just a little earlier) that a downturn was coming. It probably should have happened in 2020, but the COVID-19 pandemic has pushed companies to beef up their cloud services as remote working has suddenly made moving to the cloud essential for many businesses.

More recently, however, the biggest companies with the most complex workloads are shutting down or postponing major projects and reducing their spending on the cloud computing power they would have needed to support them.

“There are three parts to the cloud slowdown,” said Maribel Lopez, principal analyst at Lopez Research, who joined MarketWatch to predict a slowdown in cloud spending earlier this year. “One has to do with the Wild West containment and rationalization of spending that businesses have been making during COVID to keep the lights on,” leading to the reductions we’re seeing now. Second, recent waves of cloud workloads by industries still slow to migrate to the cloud — like government, healthcare, and education — “are the most complex, time-consuming, and difficult to migrate. quickly to the cloud”. Finally, there is a general fear linked to the macroeconomic environment, leading to cuts where leaders can find them.

Read also: Cloud boom comes back to earth.

Wall Street reacted quickly and strongly, ripping more than $300 billion in market capitalization from Microsoft and Amazon this week if Amazon’s sharp decline in Thursday’s after-hours session persists. But this is where it helps to think longer term: just because cloud growth is in decline doesn’t mean the technology isn’t still essential for the future.

Microsoft and Amazon will continue to grow and sell their cloud computing offerings, and they’ll see healthy margins on those. Google continues to invest in its cloud business, adding 2,000 new employees through its acquisition of Mandiant last quarter, and executives said this week that businesses and governments are still in the early days of public cloud adoption. .

“We are pleased with the momentum in the cloud and continue to be excited about the long-term opportunity,” Ruth Porat, Alphabet’s chief financial officer, told analysts this week.

Many analysts agree. Dan Ives, an analyst at Wedbush Securities, said in a Microsoft note this week that “the move to the cloud is still less than 50% penetrated.” Growth is slowing as inflation continues and the strong dollar outside the United States hurts the revenues of many tech giants, forcing many companies to suspend spending, but this is a problem to be faced. short term.

Switching to a cloud provider is not for the faint-hearted, and it’s a transition that in some cases takes longer than expected. The same will apply to investing in the cloud in the long term, even if there are difficulties currently. It’s still a massive and important part of the tech industry, a critical activity that has kept businesses running around the world during the pandemic. Regardless of the future growth rate, the cloud seems here to stay.

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