Cloud hangs over US chip makers on worries data centre growth could slow

Cloud and data centres, the chip industry’s strongest sector, may be its next problem: Signs are showing growth could slow in what has been a pillar during the Covid era as consumers signed up for cloud-based entertainment and companies retooled their offices.

Analysts say the cloud market has rarely had to weather a prolonged economic downturn since it rose to prominence in the last decade as more businesses adopted the technology, making it harder to predict if it is recession proof or it will be hit in an economic downtown.

As 40-year-high inflation weighs on consumers and economists debate recession signals, advertisers have been tightening their purse strings, say Big Tech companies.

“Investors are worried it’s the next shoe to drop,” said Bernstein analyst Stacy Rasgon, adding that an advertising drought hurting the likes of Facebook and Snapchat could spur cutbacks in data centre investments.

Big Tech has reported slower annual cloud revenue growth rates this earnings season – Alphabet Inc’s Google Cloud dropped over 8 percentage points, Microsoft Corp’s Azure dropped 6 percentage points, and Amazon.com’s AWS dropped over 3 percentage points compared with the previous quarter.

Nathaniel Harmon, research director at YipitData, said the revenue growth of the cloud market was still significant, although he noted there were pockets of weakness in regions like Europe creeping in.

The three companies have also said during the pandemic they will keep data centre equipment longer, in some cases up to six years, from three, to save money.

“If they’re going to be cutting back their spending on data centre capacity, well that’s fewer chips from Intel or AMD,” said Glenn O’Donnell Research Director at Forrester Research.