When the March quarter earnings for MSFT and AMZN are released, it is likely that cloud computing sales growth will slow for Amazon.com and Microsoft. Amazon Web Services is the largest cloud service provider and will likely suffer the most.
Cloud computing revenue growth slowed down dramatically in 2022 after years of rapid growth. This is partly due to the law big numbers - growth was expected at some point to slow down. AWS sales grew 29% in 2022 to $80.1 billion.
One factor is the fact that many corporate clients have re-evaluated how they can use cloud services most effectively. If the U.S. economic situation falls into recession, many companies may cut back on cloud spending.
A report by Jefferies said that Wall Street analysts expect AWS revenue growth to slow down to 15% in the March quarter from 37% one year ago.
UBS also expects AWS to see a slowdown in sales growth, to 13% for the March quarter.
In a client note, UBS AMZN analyst Karl Keirstead said that "customer efforts to optimize/trim cloud spend are far beyond any historic norm. Our checks suggest that the optimization efforts will last longer and be more thorough than most people think."
He continued: "In relation to the consensus opinion that we are deep enough in these efforts that the deceleration of cloud growth can start moderating meaningfully even as early as Q22023, we conclude such efforts will continue at a high-level throughout 2023."
Microsoft and Google are expected to report their earnings on April 25. Amazon has yet to set a date for its earnings report.
The slowing growth of cloud revenues is a negative factor for AMZN and GOOGL stocks. This is also a negative for many software companies and cloud infrastructure providers. The internet data centers, which are the size of a warehouse, are crammed with computers servers, high-speed communication gear and data storage devices.
Brent Thill, an analyst at Jefferies, said in a recent report that Wall Street consensus estimates for AMZN's stock predict AWS revenue growth will "trough" during the second quarter of 2023. Then it will slowly accelerate.
Investors are concerned about the sustainability of AWS's growth, as customers focus on cost optimization during a time of budget scrutiny and delay more extensive transformations.
He said: "We have cut our AWS growth estimate for fiscal 2023 by 3.5%, and we now expect AWS to grow at 12% (1% less than consensus).
UBS estimates that Google Cloud revenue will grow by 28% in Q1 2023 compared to 44% in March 2022.
Microsoft's third fiscal quarter is the March quarter. Microsoft's Azure cloud division is expected to see a 30% revenue growth, down from a 49% increase compared to a year ago.
Thill, a Jefferies analyst, also expects that pricing pressure will continue.
The AMZN analyst stated that "AWS operating profit margin continues to be under pressure, having peaked at 35% in Q1 2020. Q4 2022 AWS's operating margin of 24,4% represents the lowest level since Q2 2017.
Customers can rent cloud servers and storage space as they need it in the "public" market. Cloud giants offer processing power and storage space by the hour, day, week, or month. Cloud companies are also pushing for new consumption-based service.
Reinhardt Krause is on Twitter @URL. Follow him for the latest updates on 5G wireless technology, artificial intelligence and cybersecurity.
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