The latest batch of quarterly earnings reports from the top cloud computing companies indicated an unnerving trend: Spending from cloud clients is slowing down.
Investors are already concerned about rising interest rates and a potential recession, so hearing management from Amazon (AMZN +1.25%), Microsoft (MSFT +1.62%), and Alphabet (GOOG +0.27%) (GOOGL +0.20%) say that customers are somewhat backing off of cloud spending right now didn't exactly instill confidence.
But should investors be worried about these companies and their long-term potential? I don't think so. You'd have to ignore some really huge cloud computing trends to think the market is on the decline. Let's take a closer look at what's really going on.
Image source: Getty Images.
What's wrong with cloud stocks?
To understand what's (temporarily) going wrong with the cloud right now, let's read what management from the companies said on their latest earnings calls:
- Amazon CEO Andy Jassy: "In AWS, what we're seeing is enterprises continuing to be cautious in their spending in this uncertain time."
- Microsoft CFO Amy Hood: "In Azure, customers continued to exercise some caution as optimization and new workload trends from the prior quarter continued as expected."
- Alphabet CFO Ruth Porat: "[W]e saw some headwind from slower growth of consumption with customers really looking to optimize their costs given that macro climate."
That last quote is a bit cryptic, but a plain way of saying customers want to "optimize their costs" is that customers are reducing spending. And that pullback on spending slowed down cloud revenue growth across the tech giants.
NASDAQ: AMZN
Key Data Points
Amazon Web Services (AWS) saw 16% sales growth in the quarter, down from 37% growth in the year-ago quarter. Microsoft, for its part, said its Azure and other cloud services grew by 27%, down from 46% growth in the year-ago quarter. And Google's cloud business sales slowed to 28% growth, a drop from 32% in the year-ago quarter.
One big reason why some cloud customers are pulling back is because of what Alphabet mentioned on its earnings call: The macro environment isn't great. Companies are worried about a recession, and the tech industry is particularly nervous. Since the beginning of this year, the tech sector has laid off 168,000 employees.
So is the cloud doomed? Very doubtful. Here's why.
Cloud stocks' silver lining
I don't want to dismiss any fears of a recession, but I think investors should keep the doom and gloom outlook on the cloud to a minimum. Even if an economic slowdown comes, the long-term trajectory of the cloud computing market is still very positive.
Consider that the public cloud market, which includes the type of cloud infrastructure services that Amazon, Microsoft, and Google provide, will reach an estimated $1.6 trillion by 2030, up from $524 billion this year.
NASDAQ: MSFT
Key Data Points
Why is it expected to grow so quickly? Because even though most companies -- from mom-and-pop stores to tech giants -- are using cloud-based services, there is still a lot of reliance on servers that exist in-house.
As Jassy noted recently: "People sometimes forget that 90-plus percent of global IT spend is still on-premises." By that, he means most of the IT spending is still for servers that companies have in-house, and much of that will eventually be transitioned to the cloud.
And Jassy isn't just operating in his own optimistic bubble either. The latest data from Synergy Research Group had this to say about the cloud: "There is no doubt that the current economic climate has constrained some growth in cloud spending, but the market continues to expand at a healthy rate despite those short-term challenges."
One of the catalysts that will likely drive cloud spending higher is artificial intelligence. These cloud companies are the backbone of ultra-popular artificial intelligence services like ChatGPT because the large language models (LLMs) require a massive amount data processing. That means that as companies large and small begin adding AI services, they'll look to Amazon, Microsoft, and Google to make it happen.
So, yes, cloud growth is taking a breather right now. But if you're worried about the cloud petering out, then you might actually be missing the fact that the cloud market is still very young and AI is poised to accelerate its usage even further.
