The sky boom has finally reached a resting height, but Wall Street is anything but resting.
Amazon.com Inc. AMZN,
the original pioneer of cloud computing, confirmed on Thursday what rivals Microsoft Corp. MSFT,
and Alphabet Inc. GOOGL,
suggested with its earnings reports earlier this week: Cloud computing growth has finally reached a plateau, as companies around the world cut costs to meet the slowing economy. Amazon Web Services, the backbone of Amazon’s profits, saw revenue hit its slowest growth ever, and executives said it will slow down even more.
“At the end of the quarter, we were more in the mid-20% growth range, so continue that forecast into the fourth quarter — we’re not sure how that’s going to play out, but that’s generally our assumption,” Amazon Chief Financial Officer Brian Olsavsky analysts said after reporting quarterly growth of 27.5%.
It was a jarring decline for AWS, which posted 33% growth in the second quarter, 37% growth in the first, 37% in the fourth quarter of 2021 and 39% growth a year ago. That shouldn’t have been too much of a surprise, though: Smaller rivals reported similar declines earlier in the week.
Microsoft’s Azure cloud business grew 35% in the fiscal first quarter, down from 40% in the previous quarter and 50% a year earlier, and executives predicted another five percentage point drop this quarter. Alphabet’s Google Cloud is also slowing, although it was the bright spot for double-digit growth in the disappointing quarter for the internet ad and search giant. Google’s cloud services grew 37.6% in the third quarter, up from 35.6% growth in the second quarter, but down from 43.8% in the first quarter and 44.6% in the fourth quarter.
Regular readers of this column shouldn’t be surprised either, as we predicted three months ago (perhaps just a little early) that a downturn was coming. It probably should have happened in 2020, but the COVID-19 pandemic led to a rush of companies to ramp up their cloud services, as remote work suddenly made a move to the cloud essential for many businesses.
Lately, however, the largest enterprises with the most complex workloads have shut down or postponed major projects, cutting spending on the cloud computing power they would have needed to support them.
“There are three parts to the decline in the cloud,” said Maribel Lopez, principal analyst at Lopez Research, who joined MarketWatch in predicting a decline in cloud spending earlier this year. “One is related to reigning in and rationalizing the wild west of spending that companies did during COVID to keep the lights on,” leading to the cutbacks we’re seeing now. Second, recent waves of cloud workloads from the industries that are still slow-rolling their transition to the cloud—such as government, healthcare, and education—are “the most complex, time-consuming and challenging to move to the cloud quickly.” Finally, there is a general fear associated with the macroeconomic environment, which leads to cuts wherever managers can find them.
Also read: The Skyboom returns to Earth.
Wall Street has reacted quickly and strongly, ripping more than $300 billion in market value from Microsoft and Amazon alone this week if Amazon’s sharp decline in Thursday’s after-hours session persists. But this is where it helps to take a long-term view: Just because cloud growth is slowing down doesn’t mean the technology isn’t still at the heart of the future.
Microsoft and Amazon will continue to develop and sell their cloud computing offerings, and they will see healthy margins on them. Google continues to invest in its cloud business, adding 2,000 new employees via its acquisition of Mandiant last quarter, and executives said this week that businesses and governments are still in the early days of public cloud adoption.
“We are pleased with the momentum in Cloud and continue to be excited about the long-term opportunity,” Alphabet CFO Ruth Porat told analysts this week.
Many analysts agree. Dan Ives, an analyst at Wedbush Securities, said this week in a note about Microsoft that “the shift to cloud is still less than 50% penetrated.” Growth is slowing as inflation continues and the strong dollar outside the US is hitting the revenue lines of many tech giants, causing many companies to freeze spending, but that’s a short-term problem.
Moving to a cloud provider is not for the faint of heart, and it’s a transition that in some cases takes longer than expected. The same will be true of investing in the cloud for the long term, even if there is some pain now. It remains a massive and important part of the tech sector, a vital business that allowed companies to continue operating worldwide during the pandemic. Regardless of future growth, the cloud appears to be here to stay.