Cloud and data centers, 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's
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 center
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 of YipitData said the
revenue growth of the cloud market was still significant, although 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 center 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
center capacity, well that's fewer chips from Intel or AMD,” said Glenn
O'Donnell Research Director at Forrester Research.
That concern was heightened with Intel Corp's data center
and AI group business dropping 16% to $4.6 billion missing Wall Street
estimates by nearly $2 billion in its latest quarterly earnings reported.
And last week Micron Technology Inc warned of an even worse
than expected outlook, this time adding that there was trouble not just in PCs
and smartphone, but also in the cloud.
But it's not as simple as slower growth of the cloud market
that's causing trouble, Micron's chief business officer Sumit Sadana, told
Reuters. Part of the problem was a shortage of some chips holding up servers
from being built leading to a pile up of other chips - a situation similar to
the auto chip shortage.
According to Richard Barnett, chief marketing officer at
Supplyframe, inventories across the server supply chain are at record highs but
key parts are missing. “Assume 500 components are needed for a server, and 10
or 20 unavailable parts are preventing its completion.”
Still Sadana warned that companies, worried about the
economy, were also being more conservative about buying chips.
O'Donnell at Forrester said he's seeing this across the tech
sector. “As we're talking with our clients about their spending plans, a lot of
them are saying, well, you know, we're not going to turn off the faucet, but
we're going to close it a bit,” he said. “You're going to see some of that
reflected in earnings from companies like Dell and Hewlett Packard Enterprise
as well.”
While executives and analysts debate the impact of the
slower growth in the cloud market, Super Micro Computer Inc ., which specializes
in customized servers for new technology, said developments such as
self-driving cars and the meta-verse are still bringing new waves of demand.
"There's a lot of pent up growth as projects go from
lab projects to deployment," Michael McNerney, Super Micro's vice
president of marketing and network security, said.
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