Slowing Growth In Cloud Stocks: When Will We Hit A Bottom
December 20, 2022
Lead Tech Analyst
This article was originally published on Forbes on Dec 15, 2022, 10:27pm EST
Nearly all cloud companies are reporting a notable, sequential slowdown between Q3 to Q4. Amazon and Microsoft’s cloud infrastructure services slowed from mid-30 percent growth in prior years to 24 percent growth and 30% growth. Only a quarter ago – in Q2 – the growth was at 29 percent and 35%. This quarter marks a 5 percent decline sequentially, which is considered a rapid decline for these two companies.
For many more highly valued cloud software companies, the sequential decline is much steeper and is closer to a 15% sequential decline. On a YoY basis, the Q3 to Q4 growth is 70% lower than it was tracking last year. For example. Snowflake grew 15% QoQ last year and is expected to grow 3% QoQ this year, marking a 12 point decline in its growth rate. This is true for most best-of-breed cloud stocks.
We covered this point on popular cloud software stocks in granular detail in a premium note for our research Members when we said:
“In some ways, the Q4 guides – assuming most come in at or near those guides – marks a historic slowdown for cloud as it’s always been a resilient category.”
The question is, at this rate of rapid decline, when will we hit a bottom on slowing growth?
Gartner, a reputable and accurate third-party analyst firm, is indirectly calling for a bottom in cloud in 2022, per its recent two surveys. However, judging by the most recent earnings results provided by the Big 3 and cloud’s top performing stocks, I believe this could be premature and it’s more likely we bottom sometime in 2023.
Sign up for I/O Fund's free newsletter with gains of up to 221% - Click Here
Gartner 2023 Surveys
In a recent report, Gartner predicted that in 2023, IT spending will recover from a notable low in 2022 in all areas except Data Center Systems. Devices will still remain negative to flat, yet show a remarkable recovery from (8.4%) to (0.6%), per the CFO 2023 survey. Software will accelerate from 8% to 11.3% while IT services will double in growth from 4.2% to 7.9%.
Across all categories of IT spending, Gartner is calling for combined growth of 5.1% in IT budgets compared to 0.8% growth in 2022. This will be down from 10.2% in 2021.
Gartner is also forecasting that 2022 is the bottom for a few public cloud end-user verticals with a year-over-year increase in software-as-a-service (SaaS), cloud management and security, and infrastructure-as-a-service (IaaS).
Of these, Cloud IaaS is expected to see the most growth from 27% in 2022 to 30% in 2023. This is on a large revenue base of $115 billion, expected to grow to $150 billion in 2023. Software-as-a-service is the largest category in cloud with revenue of $167 billion, expected to grow to $195 billion at a rate of 17%.
Notably, some areas are expected to decline, such as BPaaS and DaaS.
Shown below, the overall cloud market is expected to grow 21%, up from 19% in 2022. This will outpace overall IT spending with growth of 5.1% by over 5X.
The 5.1% growth lags the current inflation rate of 6.5%.
Cloud IaaS Growth Saw 3% Headwind in 2022, More to Come?
Gartner released the 2023 survey results in October, and later that month, Q3 earnings results from Big Tech reported a decline in Cloud IaaS. Perhaps the survey is predicting a rebound from H2 2022 to H1 2023, but this would be hard to determine until budgets are set in the earlier part of next year.
In most cases, we are seeing a 10% deceleration from the early part of the year to the second half of the year. For now, actual results from the Big 3 Cloud IaaS providers disagree with Gartner’s survey predictions that a rebound is coming. This is despite Cloud IaaS predicted to be the more resilient line item in public cloud end-user spending.
The biggest names in tech are reporting their earnings right now, and our premium members are getting updates almost daily. Learn more about about our premium membership here.
Mixed Reports Following Q3 Results
Gartner’s prediction that cloud budgets will expand contrasts with other surveys that suggest the opposite. For example, according to a survey by Wanclouds, 81% of companies were directed by the C-suite to reduce cloud spending or to occur no additional costs.
The venture capital firm Accel published a report that showed private funding for cloud companies dropped as much as 42% across Europe, Israel and the United States in Q3. This often translates to lower valuations and/or lacking a clear path to a strong exit on the public markets or through an acquisition.
This doesn’t mean the migration to the cloud is slowing down, by any means. According to Accel, spending on automation and digital transformation is expected to rise from $1.8 trillion to $2.8 trillion by 2025. The drawback to these kinds of forecasts is that it may slow considerably in 2023 before a rebound occurs.
Cloud spending may turn out to be softer than industry surveys indicate, especially until inflation cools off. This is because surveys capture a perception while earnings results are the culmination of a 7.1% inflation rate, plus a softer Chinese market and a softer European market.
The Big 3 are the best proxy because their reports represent the layer in the tech stack that tends to be the most resilient in terms of churn. The switching costs are quite high for cloud IaaS services. The Big 3 also afford a more concentrated view by owning 66% of market share across three companies whereas SaaS is spread across thousands of companies.
For our premium members, we dig deeper into mid-cap cloud companies to determine which ones are decelerating more quickly than their peers and also which leading cloud stocks we plan to buy when we sense there is a rebound. You can learn more here.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
Gains of up to 403% from our Free Newsletter.
Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!
+344% on Nvidia
+403% on Bitcoin
+218% on Roku
*as of March 15, 2022
Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.
If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 324% on Zoom, 601% on Nvidia, 445% on Bitcoin, and 4-digits on an alt-coin. The I/O Fund is audited annually to prove it’s one of the best performing Funds on the market with returns that beat Wall Street funds.
More To Explore
The Strongest Cybersecurity Stocks In Q3
Cybersecurity stocks have performed well in 2023, rising about +26.5% YTD, with the security backdrop boosted by an increase in data breaches and ransomware.
Nvidia’s Fiscal Q3 Earnings Preview: The Pressure Is On
Nvidia has surged this year with 241% gains YTD, which has more than doubled the returns of the FAANGs. This is no small feat considering it’s widely understood Big Tech is holding up the broader mark
Apple’s Services Growth Flywheel Continues To Strengthen
Apple’s Services segment was one of the brightest spots in a relatively in-line earnings report at the beginning of November, topping an $85 billion run rate as growth jumped back to the high double-d
Tesla Sells 33% Of Vehicles Below Average Cost, BYD Pulls Ahead
BYD more than doubled Tesla’s China sales in October as Tesla’s sales slipped on a month-over-month basis, while NEV startups showed strong sales numbers across the board. China’s new energy vehicle (
Solar Stocks Still Searching For A Bottom
Solar is arguably one of the market’s most sold-off industries at the moment, with the Invesco Solar ETF falling more than 42% YTD as the industry struggles to find growth in a high-rate environment.
Five Stocks (Not Seven) Can Lead to New Highs
The majority of other sectors are confirming a continuation of the 2022 bear market, meanwhile, a handful of big tech names, with outsized weighting in the major indexes, suggest that they want to go
Big Tech Stocks: Q3 Earnings Preview
Earnings season has officially kicked off, with Big Tech headlining a busy week next week: Microsoft and Google report on Tuesday, followed by Meta on Wednesday, and Amazon on Thursday. Big Tech stock
AI Could Be Apple’s Next Chapter
After Nvidia added $750 billion in value this year on the backs of surging AI chip demand, investors are quickly searching for the next trillion-dollar AI winner. AI is the best investment opportunity
AI is the Best Investment Opportunity of our Lifetime: Video Interview
Real Vision invited Beth Kindig back for a candid interview with Raoul Pal for a one-hour discussion on how to position for AI. As discussed in the interview, the reason that AI will be the best inves
The Next Market AI Will Disrupt Is Cybersecurity
Cybersecurity is one of the highest costs that enterprises face at 12% of IT budgets on average, and this cost is rapidly rising. While a company can lay off staff or reduce marketing and R&D expenses