There's an "AI Cloud" future that excites investors.
Then there's a legacy "Cloud 1.0" business that AWS has dominated for years.
So far, Microsoft is winning the "AI Cloud" future.
The cloud industry is splitting into 2 distinct parts.
There's the "AI Cloud" future, where Nvidia GPUs and large language models form the foundation of new generative AI services delivered and rented over the internet. That's hot and Microsoft, with help from OpenAI, is in the lead. (Google Cloud is trying hard here, too).
Then there's the existing "Cloud 1.0" business, where CPUs and more traditional servers support apps, websites and other software services. This is not so hot anymore, in the eyes of many investors. Amazon Web Services has dominated this market for over a decade.
Microsoft's quarterly earnings earlier this week stoked concern about the Cloud 1.0 market, according to analysts.
"There is a worry out there that non-AI cloud workloads continue to slow down industry-wide," Mark Schilsky, a TMT sales specialist at Bernstein Research, wrote in a recent note to investors.
Microsoft's Azure cloud business saw revenue grow 28% in its latest quarter (fiscal Q2, calendar Q4). But 6 percentage points of that growth was due to new AI workloads. That, in theory, leaves the old cloud business growing by 22%.
"Thus, one could argue that non-AI Azure growth is slowing down which bodes relatively poorly for other cloud consumption companies like Amazon, etc.," Schilsky wrote. "That may be a bit of a leap, but we will find out a LOT more on Thursday when Amazon reports Q4 earnings. Stay tuned."
Goldman Sachs analysts pointed out the same thing this week after Microsoft reported.
"The rapid acceleration of AI revenue (driving 6 points of Azure growth) opens questions around the strength of broader cloud computing spend," they wrote in a note to clients.
Amazon reports later on Thursday. Wall Street is looking for AWS Q4 revenue to grow 13% or 14% year-over-year. For Q1 2024, investors expect AWS sales to rise about 15% year-over-year, according to Bernstein.
"How excited are investors going to be if AWS is now a mid-teens grower rather than a high-teens to 20 percent grower? With Microsoft continuing to take share?" Schilsky wrote.
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