• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing

6 Things We Learned About Cloud Spending By Tech Giants During Earnings Season

Though there's a pocket or two of softness, cloud capex growth remains pretty strong overall.
By ERIC JHONSA
Nov 21, 2018 | 08:18 PM EST
Stocks quotes in this article: GOOGL, FB, AMZN, MSFT, TCEHY, BABA, INTC, NVDA, ANET, WDC, STX

Overall, U.S. and tech giants are still spending aggressively on their cloud infrastructures -- even if there's some choppiness here and there.

Here's a look at some of the things that were uncovered about cloud capex trends during earnings, as both major Internet/cloud service providers and their suppliers reported.

1. Google and Facebook Are Still Rapidly Growing Their Capex

Alphabet/Google's ( GOOGL) cash capital spending rose 49% annually in Q3 to $5.28 billion, something that CFO Ruth Porat attributed on the earnings call to both "data center construction projects in flight as well as ongoing expansion in [Google's] compute capacity." And though it's worth noting that real estate purchases made during the first half of 2018 are playing some role here, the consensus is for Alphabet's capex to rise 75% this year to $23 billion.

Facebook (FB) , for its part, used its Q3 call to lower its 2018 capex budget to a range of a $14 billion to $14.5 billion from a prior target of $15 billion. However, that still implies capex will more than double from a 2017 level of $6.7 billion. Moreover, Facebook forecast its capex will rise to a range of $18 billion to $20 billion next year.

Notably, when asked about Facebook's capex needs, CFO Dave Wehner suggested investments in server capacity used to support Facebook's feed and ad-ranking algorithms are playing a big role -- it wouldn't be surprising if, along the same lines, Google is spending heavily to support its search and ad-ranking algorithms. Wehner also noted Facebook is spending more to support Asian markets where it's still seeing healthy user growth.

2. Amazon's Capex Growth Is More Subdued

Amazon.com's (AMZN) purchases of property and equipment via capital leases, which is driven in large part by Amazon Web Services (AWS) and grew strongly during much of 2017, rose just 3% annually in Q3 to $2.33 billion. That follows a 14% drop in Q2.

On Amazon's call, CFO Brian Olsavsky reiterated his company's efforts to run its data centers more efficiently have much to do with the slowdown in data center capex growth. And while it's quite unlikely that Amazon's property/equipment lease growth will remain at such low levels, there's clearly a big contrast right now relative to Facebook and Google's capex growth.

3. Microsoft Is Somewhere In Between

Microsoft (MSFT) , Amazon's largest cloud infrastructure rival, reported that its capex rose nearly 60% annually to $4.3 billion. However, the company also forecast capex will be flat sequentially this quarter (that implies annual growth of around 30%), and reiterated capex growth will "moderate" in fiscal 2019 (ends in June 2019) from a fiscal 2018 rate of slightly over 30%.

On Microsoft's call, CFO Amy Hood noted efforts to grow Microsoft Azure's geographic footprint are contributing to its capex growth, as is general demand growth for Microsoft's cloud services.

4. Alibaba and Tencent Are Growing Capex Strongly Off of Smaller Bases

With the qualifier that this figure also covers real estate and content license purchases, Alibaba's (BABA) capital expenditures rose 39% annually to $1.81 billion. Tencent (TCEHY) , meanwhile, saw its capex rise 71% in RMB to RMB5.97 billion ($862 million)

5. Intel, Nvidia and Arista Are Still Seeing Healthy Cloud Spending Trends

Intel's (INTC) Data Center Group (DCG), which handles sales of server CPUs and other data center products, saw its sales to cloud service providers rise 50% annually in Q3. And though it cautioned DCG's cloud sales can't be expected to grow 50% forever, the chip giant suggested cloud demand remains good.

Nvidia's (NVDA) Datacenter segment, which covers sales of server GPUs and hardware to both cloud providers, posted revenue of $792 million. That was a little below analyst expectations, but still good for 58% annual growth. The business continues getting a big lift from the large investments cloud giants are making in GPU-accelerated hardware that's used to train AI/deep learning algorithms, and is also seeing sales of GPUs used to run those trained algorithms against real-world content pick up.

Arista Networks (ANET) , a major provider of data center switches to cloud giants, beat Q3 estimates on the back of 29% revenue growth and issued in-line Q4 sales guidance. On Arista's call, CEO Jayshree Ullal suggested demand from "cloud titans" remains strong, albeit while cautioning Arista's sales to these firms "don't track one-to-one" with their capex.

6. Hard Drive Makers Are Seeing a Slowdown in Cloud Orders

Western Digital (WDC) raised eyebrows in October when it cautioned that it's seeing a "temporary slowdown" in hard drive demand from "large cloud service providers," and would only forecast demand would get better in the second half of 2019. Not long afterwards, archrival Seagate (STX) warned it saw a "digestion cycle" begin for cloud-related hard drive purchases during the September quarter, and said its "best estimate is that [the cycle] may last for up to three quarters."

Though such buying cycles are indeed a fact of life for many cloud suppliers, it's possible that -- as noted by Mizuho analyst Vijay Rakesh while going over Seagate's earnings -- a recent plunge in NAND flash memory prices could also be weighing, by making solid-state drives (SSDs) more price-competitive with hard drives. Research firm DRAMeXchange recently forecast NAND prices will see a fresh double-digit sequential drop in Q4.

The Big Picture

Data center capex is by its nature very lumpy from quarter to quarter for individual companies. Annual growth can swing a lot based on the timing of major hardware orders or construction work, and also based on when a company chooses to pause its purchases to work through its existing assets.

Nonetheless, looking at the group as a whole, cloud capex trends still look fairly healthy. While spending growth could slow a bit in 2019 from 2018's sky-high levels, the demands placed on cloud infrastructures by secular trends such as public cloud service adoption and online video consumption, as well as by the computing demands imposed by the complex algorithms (including AI-powered algorithms) that are powering many consumer services, makes it likely that cloud capex will still rise at a healthy clip over the next few years.

It also doesn't hurt that many of the companies responsible for much of this capex are still growing their Internet and cloud-related revenue streams at 20%-plus clips. Unlike, say, telecom service providers that have been struggling to deliver positive service revenue growth, there's a strong revenue foundation in place among cloud giants for collectively spending a lot more on capex 3-to-5 years from now than they do today.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

Alphabet, Facebook, Amazon.com and Microsoft are holdings in Jim Cramer's Action Alerts PLUS member club .

TAGS: Investing

More from Investing

Corrective Action Produces Fading Confidence and Technical Damage

James "Rev Shark" DePorre
Feb 26, 2021 5:08 PM EST

It's dangerous to have too much exposure now, but the potential for a good recovery is there once interest rate issues are digested.

I'm Intrigued by the Recent Pullback in Aurora Mobile

Timothy Collins
Feb 26, 2021 3:30 PM EST

While the Chinese company is still not profitable, it is cash flow positive.

Salesforce Gets a Quant Downgrade on Top of Weakening Charts

Bruce Kamich
Feb 26, 2021 12:50 PM EST

Here's what investors and traders need to think about.

My Preference Right Now Is to Buy Pre-Deals

Timothy Collins
Feb 26, 2021 12:36 PM EST

I've added a few names that I see as a great risk-reward because of the limited downside.

I've Been a Buyer Friday, Making Partial Buys Like I Always Do

James "Rev Shark" DePorre
Feb 26, 2021 12:07 PM EST

It's premature to predict that a low has been made, but plenty of stocks are quite washed-out already and are starting to find support.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:32 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Navigating a Market Correction
  • 11:29 AM EST GARY BERMAN

    Where Does the Nasdaq Go From Here?

    Where does the Nasdaq Composite (CCMP) index go fr...
  • 12:31 PM EST GARY BERMAN

    Has the Short-Term Top Come for the XLF/Banks?

    The has triggered a long-term overbought signal ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login