Big Tech Earnings Face More Heat as Cloud Cover Fades

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 and Microsoft Corp.—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 Inc. has the smallest cloud business of the three and reported that Google Cloud grew by 32 percent. This is the slowest growth since 2019 when the company started reporting this measure.

These poor results reflect a shift in post-pandemic frugality among corporate customers, whose budgets have been squeezed over the past 12 months by rising interest rate and high inflation.

“Once thought as the most defensive revenue stream in tech, we are seeing investors questioning the cyclicality for the (cloud) business,” Bernstein analysts stated.

Cloud services were a reliable source for information for many years. Earnings Amazon and Microsoft.

3D printed figurines and clouds in front of AWS (Amazon Web Service), cloud service logo in an illustration taken February 8, 2022. (Dado Ruvic/Illustration/Reuters)

In each quarter of calendar 2020 when the pandemic hit, Microsoft saw growth of about 50 percent in Azure cloud computing business. During the same period, Amazon Web Services (AWS), market leader in cloud computing, reported a sales increase of around 30%.

However, times have changed.

Growth at AWS slowed to a record low of 20 percent 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 percent to beat expectations for October to December. However, its current quarter forecast of $21.7 billion-$22 billion was lower than the estimates of $22.14 trillion.

“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.

Brian Olsavsky (Amazon finance chief) stated that Amazon expects slower cloud growth rates in the coming 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,” James Cordwell is an 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. Companies that provide services to support AI technology will benefit from the huge computing power required by AI applications.

Microsoft, as an investor and partner in OpenAI, appears well-positioned, analysts stated. However, any gains could take time to convert 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 stated.

Yuvraj Malik, Aditya Soni

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