Big Tech earnings miss estimates, bets on AI

Big Tech earnings miss estimates, bets on AI

In this Nov. 10, 2016 photo, people walk near a Microsoft office in New York. PHOTO AP Big Tech results highlighted concerns that a boom in cloud services is easing, limiting a lucrative source of profit when a slowing economy has hit the companies' other businesses, prompting a bet on artificial intelligence as the next growth driver.

Earnings from Inc and Microsoft Corp - which together dominate the cloud market - showed growth in the business was at its lowest since they started breaking out the metric in 2015 and was on track to slow further.

Alphabet Inc, which has the smallest cloud business among the three, said Google Cloud grew 32 percent, the slowest increase since the company began reporting on the measure in 2019.

The poor results reflect a shift to post-pandemic frugality by corporate customers whose budgets have been squeezed in the past year due to high inflation and rising interest rates.

As the most defensive revenue stream in tech, we are seeing investors questioning the cyclicality of the cloud business, according to analysts at Bernstein.

Cloud services have been a reliable source of earnings for Microsoft and Amazon for a long time.

The Windows maker posted growth of around 50 percent in its Azure cloud-computing business for each quarter of calendar 2020, when the pandemic forced people to work and study at home. The market leader Amazon Web Services AWS reported a 30 percent increase in sales during the same period.

Growth at AWS slowed to a new low of 20 percent in the last three months of 2022 to $21.4 billion, slightly missing analysts' estimates of $22.03 billion, according to Refinitiv data.

ALSO READ: Microsoft Cloud outage hits users around the world.

Microsoft's revenue in its so-called intelligent cloud business, including Azure, increased 18 percent to beat expectations for October to December. The current-quarter forecast of $21.7 billion to $22 billion was less than estimates of $22.14 billion.

Andrew Lipsman, principal analyst at Insider Intelligence, said that the deceleration in AWS was worse than expected and means that Amazon can't rely on the business units' operating profits as much in the coming quarters.

The company expects to see a slower cloud growth rate for the next few quarters, according to Amazon finance chief Brian Olsavsky. That was echoed by Microsoft, which said last week that growth in its Azure cloud-computing business would slow down by 4 -- 5 basis points in the March quarter.

There is a shift to focus on efficiency after two years of rapid movement of workloads to the cloud, and there is a lot of inefficiency in cloud spending, according to James Cordwell, analyst at Atlantic Equities.

After the success of OpenAI's ChatGPT, a potential boom in AI could boost demand for cloud services, analysts said. A boon for companies with services that help run the technology is the fact that AI applications require massive computing power.

Microsoft is well poised as an investor and partner of OpenAI, but any gains may take time to turn into profits, according to analysts.

READ MORE: EU, US, to launch first-of-its-kind AI agreement.

It will take time for an AI advancement to occur and demand for related cloud services to materialize. Lipsman said that they're not likely to offset current headwinds in the enterprise market over the next few quarters.