By Adam Levine
Not that long ago, the cloud was Big Tech's greatest strength. Now it might be its kryptonite.
Amazon.com, Microsoft, and Google parent Alphabet have recently reported generally impressive numbers, but their stocks all fell largely because of very slight cloud misses. Meanwhile, Meta Platforms' stock soared. The difference? Meta has no public cloud to rain on the parade.
The earnings reports made clear that the breathtaking pace of capital expenditures for AI data centers will continue in 2025. That has raised the bar across Big Tech, especially for the cloud, where a growth slowdown has long been inevitable.
Amazon, which pioneered the public cloud category with Amazon Web Services, sees roughly 20% annualized growth from its AWS cloud business, down from over 50% five years ago. Now Google and Microsoft may be experiencing a similar trend. Google Cloud Platform and Microsoft Azure are still growing 30% annually, but the latest earnings suggest that growth may be decelerating. That reality pressured shares over the past two weeks, and the pain may not be over.
Cloud softness feels particularly acute, with tech companies spending gobs of money to build out artificial-intelligence capabilities.
During its fourth-quarter earnings call on Thursday, Amazon projected around $105 billion on capital expenditures in 2025, a 27% rise from 2024, which was 57% over 2023. Microsoft has guided to $80 billion in capex for its fiscal 2025, ending June, up 80% from 2024, which was up 58% from the year before. Google estimated capex of $75 billion in 2025, up 43% from 2023, which was up 63% from 2022.
Meta Platforms is moving into the same neighborhood, with a forecast of $60 billion to $65 billion of capex in 2025, up 68% at the midpoint from 2024, which was up by 37% from the year before. Meta differs from the others in that it doesn't have a cloud unit that rents out servers; these new data centers are all for Meta's use.
The capex numbers are eye-watering, and investors want to know how long it will take for revenue and profit to begin flowing from them. Rolling out sales-generating AI services will take time, but the immediate place new AI revenue has emerged is in accelerated growth rates in the cloud units of Amazon, Microsoft, and Google. But this latest quarter raised some doubts even there.
Amazon's fourth-quarter results were a mixed bag -- and it wasn't just because of the cloud. Overall, the company beat on sales and profitability, but that came with narrow misses in its two fastest-growing segments, AWS and advertising. Its overall first-quarter guidance was also disappointing. Amazon shares were down around 4% on Friday.
Microsoft posted solid consolidated numbers, beating analysts' expectations on both revenue and earnings per share. Yet the stock fell 6% the next day. The culprit was annual growth in its Azure cloud unit of 31% -- spectacular, but not spectacular enough for investors whose patience is beginning to run thin. That growth rate was at the low end of Microsoft's guidance, and represented deceleration.
"Growing a business as big as Azure 31% is pretty amazing but it has decelerated from growth of 33%, 34%, and 35% in the prior three quarters -- and was widely expected to accelerate in the March and June 2025 quarters," Melius analyst Ben Reitzes wrote in a note to clients. "It doesn't look like that is happening."
Microsoft attributed the Azure miss to continued supply constraints for Nvidia AI accelerators, and to allocating too many sales teams to AI at the expense of traditional servers that still run things like websites, online games, and web apps.
Cue the selloff.
Alphabet also beat Wall Street expectations for earnings per share, but fell short on revenue by a hair. Contributing to that was cloud revenue of $12 billion, when Wall Street expected $12.2 billion. Google Cloud grew revenue by 30% over 2023, but analysts wanted 33%. Both numbers marked a deceleration from the previous quarter, when growth was 35%.
Google attributed the miss to the same supply issues Microsoft had. Here too, investors didn't seem interested in nuance. Google shares declined 7% on the news.
Two Big Tech companies stood out. With no cloud unit to report, Meta's results simply couldn't disappoint in the same way as some of its rivals. Meta had nothing to draw attention away from its advertising growth of 21% in the fourth quarter. Meta stock rose 1.6% the day after reporting.
Among the Big Tech group, Apple is alone in sitting out the AI arms race, spending only $10 billion on 2024 capex, and not guiding to any sort of sudden rise. Apple relies on rented computing in other companies' clouds, its own chips, and small on-device AI models. In a post-DeepSeek world, where models could be commoditized, Apple may have settled on the right strategy.
"The capex surge at Alphabet highlights perhaps why Apple is able to garner such a relatively high multiple in the Mag 7 these days as it may prove to be the business model that benefits most from lower model costs -- generating more free cash flow than net income," Reitzes wrote.
Apple shares were down just 0.7% after its report.
Write to Adam Levine at adam.levine@barrons.com
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(END) Dow Jones Newswires
February 07, 2025 21:30 ET (02:30 GMT)
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