Cloud Growth Slowdown Looms, Suggesting Tech Boom Near Peak
(Bloomberg) -- The staggering growth of cloud computing can’t go on forever. And reports from tech companies that make data-center hardware and sell the services suggest the industry’s expansion is cooling.
Western Digital Corp., a maker of memory chips, neatly listed everything that is suddenly wrong with the technology industry when it gave a disappointing forecast late Thursday. A boom in spending by cloud-service providers such as Amazon.com Inc. is showing signs of slowing and there is too much supply of memory chips in an industry that had promised not to repeat a pattern of past loss-causing gluts. Trade with China, monetary policy and foreign exchange fluctuations are causing concern the U.S. economy will slow and hurting orders for computer-storage products, Western Digital Chief Executive Officer Steve Milligan said.
While technology executives can do little about international relations and government interest rate policies, they’ve been evangelizing the benefits of a shift by companies to the use of massive data centers providing computing power and services over the internet. Amazon, Microsoft Corp. and Alphabet Inc.’s Google are the three biggest providers of those services and some indicated the pace of their spending will slow.
The flood of investment on equipment needed to house data and make sense of it has been crucial to a rise in the fortunes of the computer-component industry, and the tech business at large, over the last few years. While cloud revenue growth rates reported for the third quarter were about 45 percent, still higher than a year earlier, “over the next five years the growth rate will inevitably tail off a bit, but that is just the law of large numbers kicking in,” said John Dinsdale, chief analyst and managing director at Synergy Research Group.
Investors seem to be getting the message. Amazon fell as much as 10 percent on Friday, Alphabet dropped 5.6 percent and Western Digital plummeted 22 percent after reporting results after the market closed Thursday. The ISE Cloud Computing Index has declined 11 percent in October, outpacing the S&P 500’s 7.8 percent drop.
Western Digital said cloud providers have spent more on storage in recent quarters than they need, for now, and a slowdown is natural. Even Intel Corp., the only large technology company to get a vote of confidence for its earnings announcement from the market Friday, agreed.
“I don’t expect that it will grow at fifty percent forever,” Intel Chief Executive Officer Bob Swan told analysts on a call late Thursday. “Fifty percent was our cloud growth in the quarter.”
Intel’s data center business, which provides server chips and other silicon to Google, Amazon and other major cloud companies, had growth of 26 percent in the third quarter, passing sales of $6 billion for the first time. It racked up that number even as general corporate spending on computer networks slowed. Swan also reminded his audience that China is a large market and is “very important to the global supply chain.”
Amazon, the biggest online retailer, on Thursday reported a second consecutive quarter of sales that fell short of estimates -- the first back-to-back revenue miss in almost four years. The company also gave a disappointing revenue and profit forecast for the busy holiday period. Even its highly profitable cloud-computing business, Amazon Web Services, didn’t grow as fast as it had in the previous three months.
Alphabet, too, missed quarterly sales estimates on Thursday and revenue growth from its main Google businesses came in at 22 percent, slower than the prior period.
While things might not continue to expand at the rate they’ve been surging forward at, companies like Google were keen to point out that their infrastructure continues to be a priority and is a competitive edge for them. Chief Executive Officer Sundar Pichai said his company is investing “in the long run.”
“On hardware, we always want to be at the forefront of computing,” Pichai said.
Microsoft has also said it will continue to invest in new products and data centers. As a result, capital expenditures will increase this fiscal year, but at a slower pace than last year, Chief Financial Officer Amy Hood said earlier this week in an interview.
Amazon CFO Brian Olsavsky said the company will be seeking to keep a lid on expenses and improve operating margins. “A lot of that is based on efficiencies of our data centers, not only for the AWS business, they’re also four our Amazon consumer businesses, who are AWS’ biggest customer,” he told analysts Thursday. “So we are really happy that again we’re seeking great cost performance in a number of areas across the business.”
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