The Atlanta Journal-Constitution
Cloud-computing giants show no sign of slumping
Cloud-computing companies have a message for skittish investors: Demand is still booming.
Earnings reports from the biggest providers of internet-based computing services — Amazon.com Inc., Microsoft Corp., and Alphabet Inc.’s Google — showed these companies are grabbing a larger share of business technology spending, defying warnings from some of their suppliers a hot corner of the industry might be cooling off.
The cloud giants entered the year facing questions about whether they could sustain their robust growth rates in an environment of uncertain global economic growth and investment. And at the start of fourth-quarter earnings season last month, investors got some worrying news from companies that sell the networking equipment and computer chips that go into the data centers that underpin the cloud. Intel Corp., Micron Technology Inc. and Juniper Networks Inc. were among those blaming lackluster results on slower spending by data-center customers.
Now, investors have some reason to be relieved. On Feb. 4, Google reported sales in its “other reve- nue” segment, a bucket that includes the Google Cloud Platform, of $6.49 billion in the fourth quarter, up 31 percent from a year earlier. Capital expenditures at Google soared 80 percent, to $6.8 billion. While the stock declined in extended trading on concerns about how the investments will impact profitability, much of the higher spending is tied to new data centers and related hardware — a signal demand for cloud services is holding up.
Recen t ly, Amazon reported its web services division, the leader in providing rented computing infrastructure from its data centers, saw revenue grow 45 percent in the fourth quarter, holding the same pace as the prior period. So did the gains at Microsoft’s Azure cloud group, where sales expanded by 76 percent. Finance chief Amy Hood said the software maker wasn’t seeing any signs of a slowdown in demand for internet-based programs and services. Alibaba Group Holding Ltd. posted 84 percent growth in its cloud unit.
“The move to the cloud continues and all the cloud providers are gaining,” said Kim Forrest, a senior portfolio manager with Fort Pitt Capital Group LLC. “Nobody is losing, it’s just some people are faster than others.”
Many analysts say businesses are still in the early years of a major shift in how they buy technology, reduc- ing their reliance on stock- ing and maintaining their own data centers and back- room servers. Instead, many are opting to power their operations using software rented from cloud-com- puting giants, turning previously consumer-focused companies like Amazon and Google into bellwethers of business technology use.
Market researcher Canalys estimated cloud-in- frastructure spending cli m bed 46 p ercent in the December quarter to almost $23 billion, bring- ing investment for 2018 to more than $80 billion. And Synergy Research Group, which closely tracks information technology spend- ing, last month increased its long-term forecasts for cloud-computing demand. Growth by co m panies’ cloud units has slowed as their businesses matured but have so far defied expec- tations for a major pullback.
“We had some pretty aggressive growth forecasts in place already,” said John Dinsdale, chief analyst at Synergy Research. “The actual growth metrics are beyond the norms of what we’d normally expect in a large, high-growth market.”
Amazon, which in recent years has spent billions of dollars on equipment to build data centers, did tap the brakes a bit on spending through the middle of last year. The company reversed course in the fourth quarter, ramping up its purchases of property and capital leases, two line items that include some spending on data centers for Amazon Web Services. An executive indicated outlays may grow further this year.
Amazon’s fourth-quarter increase in capital expen- ditures, 17 percent, “is a low number for us when you talk about supporting the AWS business that’s still growing at a high clip,” Chief Financial Officer Brian Olsavsky said on a confer- ence call recently.
On Jan. 24, Intel, which supplies about 99 percent of the processors that run servers, raised alarms when it blamed a weak revenue forecast in part on a slow- down in spending from large cloud-computing cus- tomers. The company’s revenue from cloud providers rose by 24 percent in the fourth quarter, compared with a 50 percent increase in the prior three months. Overall its server-chip unit posted a 9 percent revenue expansion, held back by a decline in spending by corporations and government agencies.
Me m ory- c hip maker Micron in December cited a buildup of unused stockpiles among customers, sparking concern that spending on key com- ponents of servers w ill weaken.
Part of the disconnect between cloud providers’ upbeat outlook and the caution from Intel and Micron could boil down to differing expectations for what happens when a wave of data centers under construction come online.
Analysts with Jefferies said in a research note that data-center related revenue at Intel and its main com- petitors grew much faster than historical trends in the last year. After previous similar spikes, growth cooled off for as long as a year as companies worked to fill their new server racks with customer workloads, the analysts wrote.
Cloud-computing spending has proved difficult to forecast, said Simon Leopold, an analyst at Raymond James who covers technology infrastructure companies like Cisco Systems Inc. and Juniper.
Historically, it was much easier to predict investment patterns from telecommunications companies such as Verizon Communications Inc. and AT&T Inc. because they would be very clear about what their capital spending plans were. That’s not the case with cloud-computing providers, Leopold said, which tend to buy components for data centers unpredictably, and without a lot of lead time, favoring bulk purchases as they build new facilities or change the system design.
Dinsdale, of Synergy Research, says short-term sales by chipmakers “have almost zero bearing on the short-term sales of the big cloud providers.” Builders of processors and networking components also have to deal with shifting demand from corporate data-center builders, as well as operators of search engines, and e-commerce and social media sites, among other customers.
“Bottom line, I wouldn’t be losing too much sleep over the growth prospects of the hyperscale cloud providers,” he said.