Cloud hangs over U.S. chipmakers on worries data center growth could slow
16/08/2022 22:43
By Jane Lanhee Lee
Aug 16 (Reuters) - 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 META.O and Snapchat
SNAP.N could spur cutbacks in data center investments.
Big Tech has reported slower annual cloud revenue growth
rates this earnings season - Alphabet Inc's GOOGL.O Google
Cloud dropped over 8 percentage points, Microsoft Corp's
MSFT.O Azure dropped 6 percentage points, and Amazon.com's
AMZN.O 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 INTC.O 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 MU.O 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
. SMCI.O , 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.
(Reporting By Jane Lanhee Lee, Editing By Kenneth Li, Peter
Henderson and Aurora Ellis)
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