Tech Giants Feel Pain As Cloud Spending Cuts Suggest Slowdown

By Tyashi Dutta, Jane Lanhi Lee and Chavi Mehta

(Reuters) - In another sign that big companies may be bracing for a looming recession, U.S. tech giants Amazon.com, Microsoft and Intel said this week that customers are taking control of cloud and data center spending.

Over the years, cloud services have been one of the biggest and most reliable sources of growth for some big tech companies, including those working and learning from home during the pandemic.

Now investors see overcapacity that will lead to a decline in investment as companies face rising costs amid rising inflation, while rising interest rates hurt consumer demand. A strong dollar has become a bit of a headwind.

Growth at Amazon Web Services (AWS), a profitable cloud entity services provider, has fallen consistently over the past four quarters, adjusted for changes in foreign exchange rates.

Corporate net sales rose 28% in the July-September period, compared with 39% a year earlier, the slowest reading since the fourth quarter of 2020. They fell less than analysts' average forecast of 31%.

Amazon shares fell 12% after hours on Thursday after forecasting a slowdown in sales growth during the holiday season, wiping about $140 billion off its market value and capping a week of disappointing earnings from the global technology company.

"The AWS slowdown is a clear sign that companies are starting to cut costs, so Amazon's earnings are likely to come under more pressure in the coming quarters," said Andrew Lipsman, senior analyst at Insider Intelligence.

Microsoft's Azure cloud business, which has driven the software giant's revenue growth for years, grew 35% in the July-September quarter, from 50% a year earlier, missing forecasts of 36.5% growth. according to Visible Alpha.

For the holiday quarter, the company expects a further decline.

Alphabet's Google Cloud revenue rose 38% in the quarter, beating guidance. It was a bright spot in a dismal quarter, but it was a far cry from the 45% growth the company achieved last year.

Europe, China move

Matt Wegner, research expert at YipitData, spoke at length about cloud deployments from AWS, Microsoft and Google's parent company Alphabet: “We had (a slowdown) just in April... and it's continuing. The European region is a source of weakness".

Inflation in the eurozone is approaching 10% and Christine Lagarde, president of the European Central Bank, acknowledged on Thursday that rising energy prices and higher interest rates pose a growing risk of an economic contraction.

Intel, which makes chips for data center customers including AWS, said revenue from the business fell 27% in the third quarter and profits were nearly flat. Business was partly affected by weak demand from the company's Chinese customers, Intel CEO Pat Gelsinger said.

The company lowered its revenue and earnings guidance for the year, reflecting economic uncertainty, which Gelsinger said will continue into next year and will take time to grow data center revenue.

Cloud services generally help businesses save money, so budget cuts in this sector can be particularly worrying, suggesting businesses feel that spending is coming on hard times.

Businesses typically build more cloud and data center capacity than they need and then wait to absorb it, said Dean McCarron, president of Mercury Research, which tracks chipmakers.

'Build more' happened in 2021 and we've slipped since then," McCarron said. He added that he expects Intel's data center weakness to ease soon, "despite broader macroeconomic concerns about how much improvement see in the next growth cycles." to have."

(Reporting by Tiyashi Dutta and Chavi Mehta in Bengaluru, Jeffrey Dustin in Palo Alto and Jane Lanhy Lee in Oakland, California; Writing by Sayantani Ghosh; Editing by Richard Pullin)

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