Opinion: The cloud boom has reached its stormiest moment yet, costing investors billions

The cloud boom has finally reached a resting height, but Wall Street is doing anything but resting.

Amazon.com Inc. AMZN, -4.06%, the original cloud computing pioneer, confirmed what rivals Microsoft Corp. MSFT, -1.98% and Alphabet Inc. GOOGL, -2.85% GOOG, -2.34% suggested in their earnings reports earlier in the week: Cloud computing growth has finally reached a plateau as companies around the world cut costs to tackle the slowing economy. Amazon Web Services, the backbone of Amazon’s profits, saw sales hit its slowest growth ever, and executives said it will slow even more.

“At the end of the quarter, we were more in the mid-20% growth range, so take that forecast into the fourth quarter — we’re not sure how it will play out, but that’s generally our assumption,” Amazon Chief Financial Officer Brian Olsavsky told analysts after he reported quarterly growth of 27.5%.

It was a shocking slowdown for AWS, which posted 33% growth in the second quarter, 37% growth in the first, 37% in the fourth quarter of 2021 and 39% growth a year ago. It shouldn’t come as too much of a surprise, though: smaller rivals reported similar delays earlier in the week.

Microsoft’s Azure cloud business grew 35% in its fiscal first quarter, compared to 40% in the previous quarter and 50% the year before, with executives forecasting another five percentage point decline this quarter. Alphabet’s Google Cloud is also slowing, though it was the bright spot of double-digit growth in the disappointing quarter for the internet advertising and search giant. Google’s Cloud Services grew 37.6% in the third quarter, up 35.6% in the second quarter, but down 43.8% in the first quarter and 44.6% in the fourth quarter.

Regular readers of this column shouldn’t be surprised either, as we predicted three months ago (perhaps a little early) that there would be a delay. It probably should have happened in 2020, but the COVID-19 pandemic sparked a rush of businesses to boost their cloud services as remote working suddenly made a move to the cloud essential for many businesses.

More recently, however, the largest companies with the most complex workloads have been closing or delaying major projects and reducing their spending on the cloud computing power they needed to support it.

“The cloud slowdown has three parts,” said Maribel Lopez, principal analyst at Lopez Research, who partnered with MarketWatch to forecast a slowdown in cloud spending earlier this year. “One is related to the Wild West’s governing and rationalizing of the spending companies made during COVID to keep the lights on,” leading to the cuts we’re seeing now. Second, recent waves of cloud workloads by industries that are still slow in their move to the cloud — such as government, healthcare, and education — are “the most complex, time-consuming and challenging to move to the cloud quickly.” Finally, a common fear is related to the macroeconomic environment, leading to austerity measures everywhere executives can find them.

Also read: The cloud boom is coming back to Earth.

Wall Street has reacted swiftly and forcefully, taking more than $300 billion in market cap away from Microsoft and Amazon alone this week if Amazon’s sharp drop in Thursday’s after-hours session continues. But this is where it helps to think about a long-term vision: Just because cloud growth is slowing doesn’t mean the technology isn’t still at the core of the future.

Microsoft and Amazon will continue to develop and sell their cloud computing offerings, and they will see healthy margins on it. Google continues to invest in its cloud business, adding 2,000 new employees through its acquisition of Mandiant last quarter, and executives said this week that businesses and governments are still in the early days of public cloud adoption.

“We are pleased with the momentum in Cloud and remain excited about the long-term opportunities,” Alphabet Chief Financial Officer Ruth Porat told analysts this week.

Many analysts agree. Dan Ives, an analyst at Wedbush Securities, said in a note this week on Microsoft that “less than 50% of the shift to the cloud is still in effect.” Growth is slowing as inflation continues and the strong dollar outside the US is hitting the revenues of many tech giants, causing many companies to cut spending, but that’s a short-term problem.

Moving to a cloud provider is not for the faint of heart, and it’s a transition that takes longer than expected in some cases. The same goes for long-term cloud investments, even if there is some pain right now. It is still a huge and important part of the technology sector, a vital activity that has enabled companies to continue to operate around the world during the pandemic. Whatever the future rate of growth, the cloud looks set to stay.

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