Amazon, Google and Microsoft show slowing cloud infrastructure growth

While the growth of traditional technology hardware and software has slowed in recent years, cloud computing has swallowed up spending, reflecting a sea change in how companies choose to run applications and store data.

But over the past two weeks, the biggest names in cloud infrastructure have issued clear warnings suggesting that the frenetic expansion of the past half-decade is cooling off. Historically high inflation and a steady increase in interest rates by the Federal Reserve have led businesses to cut spending and look for ways to make the most of their existing infrastructure.

Amazon, Microsoft And Alphabet, the three market leaders in cloud-based storage and servers, all reported a deceleration in their respective businesses. On Thursday, Amazon Web Services and Google Cloud, which also includes Workplace productivity software, posted fourth-quarter revenue below analysts’ estimates.

“In the fourth quarter, we saw slower consumption growth as customers optimized the cost of GCP, reflecting the macro backdrop,” Ruth Porat, Alphabet’s chief financial officer, told analysts on the call. to the results.

Google Cloud’s revenue growth slowed to 32% in the fourth quarter from nearly 38% in the third quarter. According to StreetAccount, revenue of $7.32 billion was below analysts’ estimate of $7.43 billion.

Amazon, which pioneered the market more than 15 years ago and retains a significant lead, said AWS revenue growth slowed from 27% to 20%. The unit posted sales of $21.4 billion, while analysts expected $21.87 billion. As recently as 2018, AWS was growing over 45%.

Brian Olsavsky, Amazon’s chief financial officer, told analysts that large companies worked with AWS in the fourth quarter to cut spending due to tough economic conditions, a trend that began midway through the third quarter. He doesn’t expect it to reverse anytime soon.

“Looking forward, we expect these optimization efforts to continue to be a headwind to AWS’s growth for at least the next two quarters,” Olsavsky said.

Amazon CEO Andy Jassy, ​​who launched AWS with company founder Jeff Bezos and led the division until taking over as parent company in 2021, spoke later at the the call to tout the strong pipeline of cloud migrations. However, according to a regulatory filing, customers have less confidence in longer-term agreements. Amazon reported $110.4 billion in commitments on contracts with original terms longer than one year. This represents a 37% increase over the previous year, down from 57% growth in the third quarter.

Bank of America analysts have lowered their forecast for AWS, and now expect growth for the year of 11% instead of 15%. That would be down from nearly 29% in 2022.

“We consider the LT cloud’s trajectory to be bent and not broken,” wrote the analysts, who have a buy rating on the stock.

Alphabet and Amazon’s results follow Microsoft’s report last week. Microsoft’s Azure unit is the second cloud infrastructure behind AWS.

Microsoft said revenue growth from Azure and other cloud services slowed to 31% from 35%, although the company did not disclose company size in dollars.

On the earnings call, CFO Amy Hood said Azure’s consumption growth moderated in December. The company expects Azure to see even slower growth in the first quarter as organizations seek opportunities to run their existing applications more cost-effectively.

CEO Satya Nadella acknowledged this trend, but said it was not permanent.

“At some point, the optimizations will end,” Nadella said on the earnings call. “In fact, the money they save in any optimization of any workload is what they’re going to invest in new workloads, and those workloads will start to grow.”

Nadella’s view is supported by at least some industry experts. Technology research firm Gartner expects the category to grow 26.8% overall for the full year, up from 25.9% in 2022. Gartner’s forecast for overall IT is a revenue growth of 2.4%.

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