The Street’s estimates for cloud growth by Microsoft Corporation (NASDAQ:MSFT), Amazon.com Inc (NASDAQ:AMZN) and Google parent Alphabet Inc (NASDAQ:GOOG) in the April to June quarter seem doable, analysts at UBS highlighted ahead of the kick-off of Big Tech earnings on July 25.
The analysts shared their thoughts about the companies’ respective cloud segments Azure, Amazon Web Services (AWS) and Google Cloud after conversations with about 30 large enterprise customers and partners.
They noted that the conclusion from their last several cloud quarterly previews was that Street cloud growth expectations needed to come down.
“While overall Street estimates for 2Q23 look doable, we do worry that the more optimistic outlook for a cloud growth rate acceleration as early as the September 2023 quarter might be a best-case scenario given still-tight IT budgets and little/no evidence from our checks for any 2H23 spending improvement,” they wrote.
“In general, any tone improvement or better results from Microsoft Azure and AWS have translated to improved sentiment towards the smaller cap ‘cloud proxy’ stocks such as Snowflake and MongoDB.”
For Microsoft’s Azure, the analysts raised their growth estimates for the fourth quarter from 26.5% to 26.9%, in line with the high end of guidance and the “investor bogey” of 27% to 28%.
They model 2Q growth for Amazon of 8%, below investors’ expectations of 9% to 11%.
“We’re being a bit more conservative modelling 8%, with a positive view that AWS is better positioned for AI workloads than the Street is embedding in Amazon shares,” they wrote.
“In particular, we expect stability in any month of July commentary and messaging pointing to acceleration in 3Q23 or 4Q23, and we’re optimistic that AWS Bedrock can start to impact AWS growth later this year.”
For Google Cloud, the analysts expect another two-point deceleration to 26% growth for the second quarter.
Attempts to rein in cloud spend ongoing
The analysts highlighted, while they were beginning to see anniversary enterprise efforts to reign in their cloud spend (as such efforts seemed to kick off around June 2022), that these efforts are ongoing and are likely to continue into 2024.
“There was little if nothing in the comments to suggest that we’re close to any post-optimization spend snap-back and the overall tone remained muted, with references to a tough new project/commitment backdrop and continued budget scrutiny,” they wrote.
They said while it was still rough out there, there were glimmers of hope that might suggest that the worst has passed.
“First, the overall tone from our customer/partner checks was consistent with that of three months ago – our checks didn’t down-tick as they did back in April and hence it seems that we’re now bumping along a bottom post the ratcheting-down of cloud spend in the March/April timeframe,” the analysts wrote.
“Second, some partners suggested that new bookings discussions are finally picking up (consistent with Snowflake’s comment last month), creating some optimism about the second half.”
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