The slowdown in cloud business has arrived

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Wednesday, October 26, 2022

Even cloud giants like Microsoft can’t avoid a slowdown

The tech company’s big cash cow has seen an economic slowdown: cloud businesses that provide customers with cheap computing power and applications.

On Tuesday, Microsoft (MSFT) reported that its most important Azure cloud unit will grow less than expected this quarter. On the same day, Google parent Alphabet (GOOG, GOOGL) reported that its Google Cloud Platform growth slowed to 37% in the third quarter of 2021 from 44% in the third quarter of 2021.

Amazon (AMZN) expects its AWS division to grow 33% when it reports earnings on Oct. 10. 27. That would be down from 39% growth in the same quarter last year.

“We’re seeing some budget pressure on the corporate side,” Piper Sandler equity research analyst Brent Bracelin told Yahoo Finance. “We certainly wouldn’t say enterprise software, cloud is not affected by the macro, and we’re starting to see cracks.”

Cloud has grown rapidly during the pandemic. The slowing economy means companies from all walks of life are cutting budgets and finding ways to save amid near-record inflation, rising interest rates and recession fears. Those cuts are hitting Big Tech.

Cloud faces big test

Cloud computing services often help companies save money. Instead of buying their own software or running their own servers, businesses of all sizes can turn to cloud providers to deliver these services over the web.

The cloud divisions of Amazon, Google and Microsoft also offer so-called commercial consumption models, meaning their customers only pay when they use cloud services. Think of it like renting a car instead of owning one when you need to travel somewhere. Instead of monthly payments, insurance and maintenance, you only pay for the time you use your car.

FILE - In this May 7, 2018, file photo, Microsoft CEO Satya Nadella is viewed in a video as he delivers a keynote speech at Build, the Seattle company's annual conference for software developers.Microsoft is requesting advice from the Federal Election Commission to secure Microsoft's new free online account security package

Microsoft reported that sales growth in its cloud services business will slow during the quarter. (AP Photo/Elaine Thompson, file)

The cloud strategies of Amazon and Microsoft have been the most successful. They are the No. 1 and No. 2 cloud providers in the world, with Amazon capturing 34% of the market in the second quarter and Microsoft 21%. Google, which is still developing its services, has a 10 percent global market share.

The cloud business is very profitable, with Microsoft reporting a 73% profit margin for its entire cloud business last quarter, and Amazon reporting a 29% profit margin for its AWS platform in the second quarter of 2022.

Investors saw the numbers and piled into Amazon and Microsoft before and during the pandemic, promising continued growth through the cloud. But that growth is being squeezed.

“There is clearly macro uncertainty. No one is immune to this. Not even an 800-pound gorilla like Microsoft,” Rishi Jaluria, equity analyst at RBC Capital Markets, told Yahoo Finance.

That scares investors. Shares of Microsoft were down about 6 percent as of midday Wednesday. Amazon fell 3.8% and Alphabet fell 7.8%, though those were also hurt by poor YouTube ad sales.

Cloud computing may make a bigger comeback than before

While Microsoft and Google’s cloud revenue is slowing, growth in these segments is likely to return to previous highs when the economy improves. Their consumption-based business model makes it easy for companies to jump ship when economic conditions permit.

Microsoft, in particular, could benefit from a broader pullback and eventually return to growth.

“Microsoft has the ability to consolidate budgets. Many companies are using 100 different software vendors, or even 1,000 different software vendors [software as a service] application,” explains Jaluria.

Microsoft can tell its customers that it can offer the same types of apps, and that it can offer those apps and its cloud services at a better price. bad news? It’s unclear when the downturn will end. For now, companies will have to get used to slower growth than they did during the tech giant boom.

go through Daniel Hawley, technical editor at Yahoo Finance.follow him @Daniel Howley

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