Earlier last week, Microsoft (MSFT 0.60%) and Alphabet (GOOG 0.20%) gave somewhat conflicting pictures of the all-important cloud computing industry. While Microsoft posted an acceleration relative to the prior quarter in its Azure cloud growth rate, Google Cloud showed a big deceleration.
So going into Thursday's key earnings reports from other tech giants, investors were looking for confirmation as to whether cloud growth is stabilizing, or if Microsoft was merely gaining market share, because of its partnership with leading artificial intelligence platform OpenAI.
Fortunately, it appears investors are breathing a sigh of relief following the earnings results and commentary from Amazon (AMZN +2.05%), the market share leader in cloud, as well as Intel (INTC +1.07%), which has exposure to the general server market.
NASDAQ: AMZN
Key Data Points
Amazon cloud growth stabilizing and optimizations "attenuating"
In the third quarter, cloud growth rates stabilized for Amazon Web Services (AWS), after having seen a big deceleration relative to the past few years:
|
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
|---|---|---|---|---|---|
|
33% |
28% |
20% |
16% |
12% |
12% |
Data source: Amazon earnings release.
While 12% isn't exactly a blowout number, this was the first quarter in which cloud growth didn't decelerate. Ever since the Federal Reserve began hiking interest rates in earnest, companies that use the cloud have been seeking cost-savings measures in preparation for a recession -- a recession that hasn't yet come to pass, by the way. Yet as these results show, it appears the cost-saving optimizations sought by cloud customers may be nearing an end, or at least decelerating.
Moreover, on the conference call with analysts, CEO Andy Jassy had some positive commentary regarding the fourth quarter and 2024, noting, "while we still saw elevated cost optimization relative to a year ago, it's continued to attenuate as more companies transition to deploying net new workloads."
More specifically, Jassy noted that Amazon closed a slew of new cloud deals in September, but which won't hit Amazon's results until October. Moreover, Jassy noted those new deals, closed in September, exceeded the entire new deal volume in the third quarter.
So at least in the short term, things seem to be picking up. In addition, Jassy also noted that the deceleration hasn't been from cutting Amazon workloads, but rather customers either switching to Amazon's in-house chips at a lower cost (but likely at better margins for Amazon), or committing to longer-term deals instead of higher-priced pay-as-you-go plans. Those types of customer savings actually tie customers closer to Amazon's cloud for the long-term, which may actually be a long-term positive for the cloud giant.
Image source: Getty Images.
And Intel had good things to say about data center, too
In addition, perhaps even more encouraging commentary came out of Intel's call. More encouraging, because Intel has not been operating from a position of strength in the data center market recently. Not only has it been losing CPU share to competitors, but Intel's bread-and-butter CPUs have also seen some share shift to GPUs in order to run artificial intelligence applications.
So, Intel has really felt the pain in the data center market, as cloud companies have greatly pulled back on traditional servers.
Yet during its own conference call, CEO Pat Gelsinger noted: "[W]e see signs of normalization as we enter Q4, driving modest sequential TAM [total addressable market] growth. Across most customers, we expect to exit the year at healthy inventory levels, and we see growth in compute cores returning to more normal historical rates off a depressed 2023."
Now, Intel has also done some self-help, as server buyers are scooping up the latest Gen 4 Intel processor called Sapphire Rapids in droves, which came out in January 2023. Management noted the volume and average selling prices of Sapphire Rapids exceeded expectations, due to the fact that the new CPU is actually good for artificial intelligence inferencing -- even if GPUs are ideal for training.
Still, aside from Intel's better execution, it was still encouraging Gelsinger noted customers had digested inventory, should return to sequential growth in Q4, and normal spending patterns next year.
The cloud market: only 10% penetrated?
There seems to be considerable debate about how big the cloud business will be. Certainly, the post-pandemic slowdown has brought out skeptics.
However, when you consider that the post-pandemic drop-off in PCs and smartphones, the growth of cloud seems almost super-human. PCs units plunged 16.5% in 2022 and is estimated to fall another 13.7% in 2023, according to IDC. Meanwhile, smartphone handset units fell 11.3% in 2022, and continued falling in the first half of 2023.
Given that Amazon was able to maintain growth in the teens and Microsoft and Google were each able to maintain growth in the 20%-plus range even in the concerted global pullback in tech spending over the past year, it sure seems the cloud still appears to have a lot of long-term growth ahead. As Andy Jassy also said on the call, in his estimation, 90% of the world's IT still resides on premises. And this is with AWS already at a near-$100 billion revenue run-rate. He believes the cloud will eventually become the majority.
Thus, with the overall market in the doldrums but cloud spending seemingly bottoming, now might be a good time to look at some of your favorite cloud computing and software stocks. And if interest rates stabilize or begin to back off their recent highs, these names could be in for a very good 2024.
