Intel (INTC) and Amazon.com (AMZN) each provided signs on Thursday that 2019's cloud capital spending pause is coming to an end.
On Thursday, Intel comfortably beat Q3 estimates thanks to a much stronger-than-expected quarter for its Data Center Group (DCG), which supplies Xeon server CPUs and complementary products. Following a 10% annual revenue drop in Q2, DCG revenue rose 4% to $6.38 billion, well above a consensus analyst estimate of $5.62 billion.
DCG benefited from improved demand from enterprise/government and telco clients, thanks partly to an estimated $200 million worth of order pull-ins from customers looking to get ahead of the potential arrival of new Chinese tariffs. But it also saw benefited from a pickup in demand from cloud service providers, aided by the recent launch of Intel's Cascade Lake Xeon CPUs.
Though Intel was dealing with a tough annual comparison -- DCG's sales to cloud providers were up 50% annually in Q3 2018 -- DCG's cloud sales managed to grow 3% in Q3. That compares with a 1% drop in Q2 that followed a 41% increase in Q2 2018.
Just as importantly, in spite of the order pull-ins, Intel forecast its so-called data-centric businesses, which (among other things) include DCG and its programmable chip (FPGA) and non-volatile memory businesses, would collectively post 6% to 8% revenue growth in Q4. CFO George Davis indicated a "continued cloud recovery" and a sequential improvement in NAND flash memory pricing would drive this growth.
Likewise, when asked on Intel's earnings call about cloud demand, CEO Bob Swan indicated that the "digestion" period that many cloud clients have been going through is winding down.
"[It's] been three quarters coming into the third quarter where [cloud providers] went through digestions," Swan said. "And what we started to see in the third quarter was, particularly for high-performance compute, [we] started to see them come back into the market to really begin to purchase a little bit more".
Separately, Amazon disclosed on Thursday that its purchases of property and equipment via finance leases, which are driven by Amazon Web Services' (AWS) capital investments, rose 55% annually in Q3 to $3.61 billion. This compares with 42% growth in Q2 and just 16% growth in Q1.
In addition, on Amazon's earnings call, CFO Brian Olsavsky indicated that Amazon's aggressive spending on AWS, both in terms of infrastructure investments and hiring sales and marketing personnel, would continue in Q4.
Microsoft (MSFT) is also growing its data center capex, though at a slower clip than Amazon. On Wednesday, Microsoft reported that its capex, which is driven to a large degree by data center investments, grew 12% annually during the company's September quarter to $4.8 billion. The company also forecast that its capex would be down a little sequentially in the December quarter, but still up annually.
Alphabet/Google (GOOGL) and Facebook (FB) will disclose their Q3 capex when they report next week. Google has previously said it expects its capex to grow in 2019, albeit at a much slower rate than in 2018 and with spending on data center construction growing faster than spending on servers. Facebook guided in July for 2019 capex of $16 billion to $18 billion, which compares with 2018 capex of $13.9 billion.
Ultimately, Amazon could end up being a bellwether for the capital spending of Internet and cloud giants -- particularly when it comes to data center hardware and chips as opposed to data center construction, which has remained fairly healthy this year.
Whereas companies such as Google and Facebook were recording very strong capex growth in 2018 -- Facebook's capex actually more than doubled last year -- Amazon's AWS-related capex rose at a far more modest clip during much of 2018, as the company digested the big investments it made in 2017 and worked to make its infrastructure more efficient.
But as the company's Q2 and Q3 capex growth makes clear, this digestion period has come to an end, and AWS is once more investing heavily to meet current and future customer needs. And it might not be that long before peers also dial up their capex. Certainly, Intel's comments about cloud demand suggest that it's not just one client that's starting to spend more.
On a micro level, the computing, storage and networking demands placed by things like the adoption of cloud infrastructure services, the growth of online video, the rising complexity of search and news feed algorithms and investments in services powered by AI/deep learning models all serve to drive long-term cloud capex growth.
And on a macro level, the fact that tech giants are generally seeing healthy double-digit revenue growth for major cloud and consumer internet businesses helps justify making bigger capital investments in the infrastructures that support these businesses.
All of this should be a tailwind in the coming quarters for chip and hardware firms with meaningful exposure to the cloud giants -- a group that includes not only Intel, but also the likes of Nvidia ( NVDA) , AMD ( AMD) , Micron ( MU) , Broadcom ( AVGO) and Arista Networks ( ANET) .
