Amazon.com, Inc. (NASDAQ:AMZN)
A discussion is now taking place on Wall Street this week concerning the future of cloud computing. This topic is relevant to the results of a number of companies, including Amazon.com (NASDAQ:AMZN), Microsoft (NASDAQ:MSSFT), and Alphabet (NASDAQ:GOOGL), amongst others. The earnings season for the first quarter is just around the horizon.
The question at hand is: For how much longer will the slowdown in spending on cloud services continue?
UBS analyst Karl Keirstead said in a research note that was issued on Monday that a round of checks with business customers and distribution partners left him convinced that the growth predictions provided by Wall Street on client cloud spending for 2023 remain too high. This note contributed to the pressure that was placed on cloud stock prices on Tuesday.
Cloud-Based Services Slowing Demand
In recent quarters, growth has slowed for all three major competitors, including Amazon (NASDAQ:AMZN) Web Services, Microsoft (NASDAQ:MSFT) Azure, and Alphabet’s (NASDAQ:GOOGL) Google Cloud. This is in part due to the fact that customers have been “optimizing” their spending in an effort to reduce expenses and increase productivity. Keirstead makes the assertion that “optimization efforts will be deeper and last longer than most think.”
Keirstead adds that he sees this as more than just a cyclical slowdown and that he believes the cloud market has entered a “more mature” phase of market development, with many firms already “deep into their cloud journeys.” In addition, he mentions that even while the Big Three cloud vendors should collectively report growth at “a still healthy” 20% rate in the March quarter, “we’re no longer at the sweet spot of the S curve,” and the growth rate from here on out will be “structurally lower.”
but, he adds that enterprise adoption is being held back by data privacy and reliability issues and that the lift to cloud demand this year could be small. Keirstead admits that the trend of artificial intelligence could bring a meaningful boost in consumption; but, he adds that enterprise adoption is being held back.
In a research paper on the same topic that was published on Wednesday, Morgan Stanley analyst Meta Marshall and her colleagues took a more “glass is half-full” perspective, which has removed some of the pressure that has been placed on cloud stock prices.
In the same vein, Marshall’s analysis acknowledges the optimization trend but says that it should boost the entire opportunity by approximately 30% in the long term. Morgan Stanley estimates that the total cloud-computing opportunity is over $18 trillion, which is “over $4 trillion higher than pre-optimization.”
63% of IT executives surveyed said the process will take at least ten months, and 44% reported that they have just started optimizing their cloud spending. These results suggest that this “digestion” phase is going to last longer than some observers may have expected it to. Discussions with customers held by Morgan Stanley, as well as those held by analysts at UBS, also suggest that this “digestion” phase is going to last longer than some observers may have expected it to. However, the two companies’ predictions regarding spending from there are very different.
According to the results of the poll, the three businesses that are most likely to gain the biggest incremental share of IT expenditures over the course of the next three years are none other than Microsoft, Amazon, and Google, in that order. Morgan Stanley believes that there will be other winners among providers of related services. The investment firm specifically mentions SAP (NYSE:SAP), Snowflake (NYSE:SNOW), Cisco Systems (NASDAQ:CSCO), and Palo Alto Networks (NASDAQ:PANW) as companies that stand to benefit from the trend. And Marshall adds that the businesses that support on-premise data centers are the ones most likely to lose incremental share of IT spending. These businesses include Oracle, Hewlett Packard Enterprise (NYSE:HPE), and the Red Hat unit of International Business Machines (NYSE:IBM).
According to Marshall, artificial intelligence is a significant factor in the growth of cloud consumption, and she predicts that the proportion of money spent on AI will rise from its current level of 3% to 9% within the next three years. She believes that Microsoft and Alphabet, due to the particular skills that each company possesses in AI software, should be the companies that benefit the most from this trend.
According to what Marshall has written, the most surprising finding from their most recent survey was not the digestion timing, but rather “how much higher the end-state adoption would be before and after optimization.” She says that according to the findings of the poll, customers now anticipate that 57% of their workloads would eventually go to the cloud. This number is up from 45% before optimization, “as CIOs now have a greater sense of cloud costs and trade-offs with other data-center methodologies.”
During a call that was connected to this one, one of Marshall’s coworkers, Sanjit Singh, upgraded both MongoDB MDB +1.33% (MDB), a provider of database software, and Confluent (CFLT), a supplier of data-streaming services, from Equal Weight to Overweight. MongoDB provides database software. Confluent provides data-streaming services. Singh believes that because “the majority of optimizations are underway and cloud-growth expectations are reaccelerating in 2024,” Mongo has an opportunity to both increase its market share and move toward profitability. Singh makes this assertion in an article he authored about Mongo.
The share price of MongoDB has increased by 9.6%, reaching $20.30, while the share price of Confluent has increased by 7%, reaching $25.02, and the share price of Snowflake has increased by 3.2%, reaching $143.61. Microsoft’s share price has increased by around 0.7%, Amazon’s share price has decreased by 1%, and Alphabet’s share price has decreased fractionally.
Featured Image: Freepik @ freepik
