Economy

Stocksak: Tech giants feel pain after cloud spending cuts suggest slowdown


© Stocksak. FILE PHOTO – Amazon boxes are stacked for delivery in Manhattan, New York City on January 29, 2016. REUTERS/Mike Segar/File Photo

By Tiyashi Datta, Jane Lanhee Lee & Chavi Mehta

(Stocksak). – U.S. tech giants Amazon.com, Microsoft (NASDAQ) and Intel (NASDAQ) announced this week that their customers were cutting back on cloud and datacenter spending.

Cloud services have been a reliable source of growth for many of the most successful tech companies for years, even during the pandemic when people studied and worked from home.

Investors are now looking to see if there is a shortage of capacity, which could lead to investment cuts. This is because companies have to deal with rising costs and soaring inflation. Consumer demand has been squeezed by interest rate rises. The strong dollar has been a significant headwind.

Amazon Web Services (AWS), Amazon’s cloud-based service for enterprises, has seen steady growth over the past four quarters, adjusted to forex fluctuations.

The business’ net sales grew 28% between July and September compared to 39% one year earlier. This was the slowest growth since the fourth quarter in 2020. They fell short of the 31% average analyst’s forecast.

Amazon shares plunged 12% on Thursday following its forecast of a slowdown for holiday sales growth. It erased some $140 million from its market value, capping a week with poor earnings from global technology firms.

Andrew Lipsman, principal analyst with Insider Intelligence, stated that the slowdown in AWS is a clear indication that businesses are starting to cut costs. This will likely increase Amazon’s bottom line over the next quarters.

Microsoft’s cloud business Azure, that had been driving revenue growth for the software giant for years has seen a drop to 35% growth in the quarter of July-September from 50% a year ago. Visible Alpha estimates a 36.5% increase, but this is not what happened according to Microsoft.

The company forecasted another drop in the holiday quarter.

Alphabet’s Google Cloud revenue grew by 38% in the last quarter, surpassing estimates. Although this was a bright spot in a gloomy quarter, it was far from the 45% growth achieved last year.

EUROPE, CHINA DRAG

Matt Wegner, YipitData research expert, said that cloud deployments from AWS (Microsoft) and Google-parent Alphabet (Google-parent Alphabet) were first noticed in April. It has continued. The European region is a source for weakness.

Eurozone inflation is at close to 10%. Christine Lagarde, President and CEO of the European Central Bank, said Thursday that the risk for an economic contraction is increasing due to rising energy prices.

Intel, which makes chips that are used by data center customers such as AWS, announced that its third-quarter revenue fell 27% and profits nearly disappeared. The soft demand from Chinese enterprise clients was partly to blame for the decline in business, Intel boss Pat Gelsinger stated.

The company reduced its revenue forecast and profit for the year reflecting economic uncertainty Gelsinger said he expected would last into next year. It was also taking time to ramp-up sales into datacenters.

Cloud services are often a cost-saving tool for companies. This could indicate that companies believe that cost is the king in these tough economic times.

Dean McCarron of Mercury Research, who tracks chipmakers, stated that businesses tend to build more cloud or datacenter capacity than is needed and then wait until it is absorbed.

McCarron stated that the “build more” event occurred in 2021, and that we have been “coasting down” since then. He said that Intel’s weakness in datacenters will be reversing soon, “but there are larger macroeconomic concerns over how much improvement we might experience on the next growth cycle.”

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Stocksak Editorial

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