Cloud weighs on U.S. chipmakers amid fears data center growth will slow

By Jane Lanhee Lee

– Cloud and data centers, the chip industry’s strongest sector, could be its next issue: signs show that growth could slow in what has been a mainstay over the past covid as consumers signed up for cloud-based entertainment and businesses reorganized their offices.

Analysts say the cloud market has rarely faced a prolonged economic downturn since it rose to prominence over the past decade as more businesses adopted the technology, which makes it harder to predict whether it weathers the recession or will be hit in an economic downtown.

As inflation at a 40-year high weighs on consumers and economists debate recession signals, advertisers have tightened their purse strings, according to big tech companies.

“Investors fear this is the next shoe to drop,” Bernstein analyst Stacy Rasgon said, adding that an advertising drought affecting Facebook and Snapchat could prompt cuts in data center investment.

Big Tech reported slower annual cloud revenue growth rates this earnings season — Alphabet Inc’s Google Cloud fell more than 8 percentage points, Microsoft Corp’s Azure fell 6 percentage points and Amazon. com AWS fell more than 3 percentage points from the previous quarter.

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

The three companies also said during the pandemic that they would keep data center equipment longer, in some cases up to six years, compared to three, to save money.

“If they’re going to reduce spending on data center capacity, well, it’s less chips from Intel or AMDsaid Glenn O’Donnell, research director at Forrester Research.

That concern was heightened as Intel Corp’s data center and AI group business fell 16% to $4.6 billion, missing Wall Street estimates of nearly $2 billion in its latest results. published quarterly.

And last week, Micron Technology Inc warned of an even worse than expected outlook, this time adding that there were problems not only in PCs and smartphones, but also in the cloud.

But it’s not as simple as slowing cloud market growth causing problems, Micron chief commercial officer Sumit Sadana told Reuters. Part of the problem was a shortage of certain chips preventing the construction of servers, leading to a buildup of other chips – a situation similar to the automatic shortage of chips.

According to Richard Barnett, director of marketing at Supplyframe, server supply chain inventory is at record highs, but key components are missing. “Let’s say 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 more cautious about buying chips.

Forrester’s O’Donnell said he sees this in the technology sector. “As we talk to our customers about their spending plans, a lot of them say, well, you know, we’re not going to turn off the tap, but we’re going to turn it off a bit,” he said. declared. said. “You’re going to see some of that reflected in revenue from companies like Dell and Hewlett Packard Enterprise as well.”

As executives and analysts debate the impact of slower cloud market growth, Super Micro Computer Inc., which specializes in custom servers for new technologies, said developments such as self-driving cars and the meta-verse always bring new waves of demand.

“There’s a lot of pent-up growth as projects move from lab projects to deployment,” said Michael McNerney, Super Micro’s vice president of marketing and network security.

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