Amazon, Google, Microsoft show slowing growth of cloud infrastructure

As growth in traditional technology hardware and software has slowed to a trickle in recent years, cloud computing has absorbed costs, reflecting dramatic changes in how companies choose to run applications and store data.

But in the past two weeks, the biggest names in cloud infrastructure have issued stark warnings that show the frenzied expansion of the past half-decade is winding down. Historically high inflation and the Federal Reserve’s continued interest rate hikes have forced businesses to cut costs and look for ways to get more out of existing infrastructure.

Amazon, Microsoft and Alphabet, the three leaders in the cloud storage and server market, have all reported slowdowns in their businesses. On Thursday, Amazon Web Services and Google Cloud, which also includes Workplace productivity software, reported fourth-quarter earnings that fell short of analysts’ estimates.

“We saw slower consumption growth in the fourth quarter as customers optimized GCP spending, reflecting the macro backdrop,” Ruth Porat, Alphabet’s chief financial officer, told analysts on the earnings call.

Google Cloud revenue growth slowed to 32% in the fourth quarter from nearly 38% in the third period. Revenue of $7.32 billion beat analysts’ estimates of $7.43 billion, according to StreetAccount.

Amazon, which pioneered the market more than 15 years ago and maintains a commanding lead, said AWS revenue growth fell to 20% from 27%. The unit had sales of $21.4 billion, while analysts were expecting $21.87 billion. Back in 2018, AWS grew by over 45%.

Brian Olsavsky, Amazon’s chief financial officer, told analysts that large companies were working with AWS in the fourth quarter to reduce their costs due to the difficult economic situation – a trend that began in the middle of the third quarter. He doesn’t expect that to reverse anytime soon.

“Looking forward, we expect these optimization efforts to continue to hamper AWS growth for at least the next couple of quarters,” Olsavsky said.

Amazon CEO Andy Jassy, ​​who created AWS with company founder Jeff Bezos and ran the division until he took over as head of the parent company in 2021, spoke later in the call to tout a robust pipeline of cloud migrations. However, according to regulatory filings, customers show less confidence in long-term deals. Amazon reported $110.4 billion in contract obligations with initial terms of more than one year. This was a 37% increase from the previous year, compared to a 57% increase in the third quarter.

Analysts at Bank of America have cut their forecast for AWS and now expect full-year growth of 11% instead of 15%. That would be down from nearly 29% in 2022.

“We see LT’s cloud trajectory as bent, not broken,” wrote the analysts, who have a “buy” rating on the stock.

Alphabet and Amazon’s results follow Microsoft’s report last week. Microsoft’s Azure division ranks second in cloud infrastructure after AWS.

Microsoft said revenue growth from Azure and other cloud services slowed to 31% from 35%, although the company did not disclose the dollar size of the business.

During the earnings call, CFO Amy Hood said Azure consumption growth slowed in December. The company expects even slower growth in Azure in the first quarter as organizations look for ways to run their existing applications more cost-effectively.

CEO Satya Nadella acknowledged the trend, but said it was not permanent.

“At some point the optimization will end,” Nadella said during the earnings call. “In fact, the money they’re going to save on any optimization of any workload is what they’re going to put into new workloads, and those workloads will start to grow.”

Nadella’s view is supported by at least some industry experts. Tech research firm Gartner expects the category to grow overall by 26.8% for the full year, up from 25.9% in 2022. Gartner’s forecast for all IT areas is for revenue growth of 2.4%.

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