Microsoft and Amazon are staring at a major backlash from Wall Street when they report their quarterly results. The two companies are expected to report a growth slowdown in the cloud business, a unit that has been a key driver of revenue growth over the years. The fact that the slowdown could be in double-digit percentage levels should be a point of concern, even as the two insist it is a short-term headwind.
Slowing Cloud Demand
In recent months the buzz around artificial intelligence has helped strengthen tech giants’ sentiments in the market. Microsoft has been one of the biggest beneficiaries on confirming the integration of generative AI into its search engine Bing. Amid the milestone, a slowdown in cloud business growth could put the company at crossroads with the investment community.
Microsoft cloud unit accounted for 38% of revenue in 2022 and 39% of income. However, enterprises’ reduced spending on cloud offerings amid the turbulent economic situation is believed to have triggered a slowdown in the first three months of the year. Consequently, Microsoft is expected to deliver a 31% decline in its Azure Revenue.
Amazon is also feeling the pinch, with revenues in its cloud unit Amazon Web Servos expected to drop 14% in the first three months of the year. Amazon Web Services revenue were up by 37% last year and was the fastest growing unit generating $22.8 billion in operating income. The other business units posted a combined $10.6 billion operating loss.
It will be the first time Amazon and Microsoft have delivered a slowdown in cloud revenue since they started reporting the performance. Over the years, the two tech giants have recorded robust growth in cloud revenues owing to strong demand for cloud offerings and services. However, fast forward, the business is facing its biggest test on businesses reigning on spending amid economic turmoil.
Analysts Cloud Estimates
Wall Street has already started to ring the alarm bells with UBS strategists lowering their growth estimates for Microsoft’s Azure. The analysts have raised concerns that customers’ bid to optimize operations and trim cloud spending will be much deeper than initially thought.
On the other hand, analysts at Jefferies believe that slowing cloud demand is a key concern for e-commerce giant Amazon. Moreover, the fact that the company is heavily dependent on cloud revenue for its operating income means its shares could underperform should there be a big miss.
The fact that the revenue slowdown in the cloud unit is not priced in could spell more trouble for Amazon and Microsoft stocks. Microsoft stock is already up by about 20% for the year, driven mainly by its increased focus on artificial intelligence. Likewise, Amazon has been on a fine run rallying by more than 23% for the year.
Amid the concerns, Chief investments strategist at MAPsignals Alec Young believes Microsoft and Amazon have what it takes to navigate the firestorm triggered by the slowdown in the cloud business. The strategists maintain the two stocks are still attractive despite the slowdown and expect a temporary pause before growth accelerates.
