Cloud Profits May Be Slowing at Microsoft and Amazon

"Once-booming demand for cloud-computing services is slowing..." reports Bloomberg. "When Microsoft and Amazon report results next week, analysts are anticipating the slowest revenue growth for their cloud-computing businesses since the firms started breaking out performance last decade."For years, demand for cloud-computing services has steadily driven growth at both Microsoft and Amazon... Microsoft's Intelligent Cloud unit, which is home to its Azure cloud-services business, accounted for 38% of its revenue and 39% of operating income in 2022. Amazon Web Services was the fastest-growing of the Seattle-based company's major businesses last year and generated $22.8 billion in operating income. The rest of Amazon's businesses combined posted a $10.6 billion operating loss. For both companies, cracks are starting to appear. In the first three months of 2023, growth for Microsoft's Azure unit and Amazon Web Services is expected to fall to 31% and 14%, respectively, excluding currency fluctuations, according to the average of analyst estimates compiled by Bloomberg. A year ago, Azure sales expanded 49% and Amazon Web Services 37%. In a shareholder letter released last week, Amazon said AWS "faces short-term head winds" related to the economic backdrop that will "soften" the growth rate. This echoed what it said in its most recent results. Microsoft also warned of a slowdown in cloud software sales last quarter. Wall Street has been getting more cautious. UBS lowered growth estimates for Azure last week, warning "customer efforts to optimize/trim their cloud spend will be deeper and last longer than most think...." Jefferies [financial services company] sees slowing cloud demand as "a key concern" for Amazon. Analyst Brent Thill said that because AWS generates so much of Amazon's operating income, "a stabilization in cloud is crucial for shares to outperform." For Alec Young, chief investment strategist at MAPsignals, Microsoft and Amazon remain attractive despite the slowdown, which he expects to be a temporary pause before growth re-accelerates. "There's still a lot of runway ahead for cloud computing, so I don't think investors should obsess too much over the level of growth over a couple quarters," he said.

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