Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets, CFDs, OTC options or any of our other products work and whether you can afford to take the high risk of losing your money.

68% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

Slowing cloud spend spooks Alphabet, Amazon and Microsoft

Three of the biggest cloud computing companies – Alphabet, Amazon and Microsoft – saw their share prices reach fresh 52-week lows after reporting earnings last week. Despite Amazon and Microsoft releasing mixed earnings, each stock’s cloud segment posted a slowdown. On the other hand, while Alphabet missed analyst expectation, its cloud division was its best performing segment.

- AWS records slowest growth rate on record

- Longer term trend of cloud adoption should continue despite challenging environment

- The three companies make up just 5.74% of the Global X Cloud Computing ETF

Three major public cloud service providers, Alphabet [GOOGL], Amazon [AMZN] and Microsoft [MSFT], all reported earnings last week with concerns about high inflation, a strengthening dollar and softer enterprise spending hanging over them.

Alphabet delivered weaker than expected results for Q3 2022. Revenue came in at $69.09bn, slightly lower than the analyst consensus of $70.6bn, according to the Financial Times. The figure represents a 6% growth rate, down from a 41% growth rate reported in Q3 2021. Earnings per share of $1.06 were a wide miss on estimates of $1.25 per share.

Amazon reported revenue of $127.1bn, narrowly missing the consensus estimate of $127.5bn. It did beat on earnings, however, posting $0.28 a share versus the $0.22 a share that analysts had expected.

Microsoft beat analyst estimates, delivering revenue of $50.1bn versus the $49.6bn anticipated according to the Financial Times. Earnings per share came to $2.35, surpassing expectations of $2.30.

The share prices of all three tech giants dropped following their earnings on Tuesday 25 October, with Microsoft and Alphabet both setting a 52-week low on Thursday 27 October. Both stocks ended the week down 2.6% and 4.7%, respectively. Amazon shares also set a fresh 12-month low on Friday 28 October, ending the week with a decline of 13.3%.

Slowing cloud growth casts shadow

Despite Microsoft beating both top– and bottom– line estimates, the company’s cloud growth continued to show signs of a slowdown. Revenue from Azure, its cloud service offering, was up 35% year-over-year, down from 40% in the fourth quarter and 50% in the first quarter of 2022. CEO Satya Nadella attributed the slowdown to customers optimising their spending.

Amazon Web Services, the tech leader’s cloud service, decelerated as well, delivering revenue of $20.5bn in the period to 30 September, up 27.5% year-over-year, but down 33% from the previous quarter. It marked the cloud unit’s slowest rate of growth on record.

Things weren’t as gloomy for Alphabet’s Google Cloud division. It was the company’s best performing segment with a revenue increase of 38% year-over-year to $6.9bn, a slight improvement on the 37% growth rate reported in Q2 2022. At the same time, however, the cloud unit’s net loss widened to $699m from $644m over the same period.

Cloud transition narrative remains intact

Looking beyond the slowdown in cloud spending, there could be brighter days ahead for others in the industry.

On the Alphabet earnings call, CEO Sundar Pichai attributed Google Cloud’s losses to the challenging macroeconomic climate, saying that some customers “are taking longer to decide, and some have committed to deals with shorter terms or smaller deal sizes, which we attribute to a more challenging macro environment”.

Nonetheless, Pichai isn't too worried about Google Cloud’s losses, “given that businesses and governments are still in the early days of public cloud adoption” – suggesting the company has its hopes pinned on larger, industrial-scale adoption supporting revenues.

Morningstar senior equity analyst Ali Mogharabi described Alphabet’s numbers as “pretty impressive” to Yahoo Finance. “The market had expected a little bit more of a slowdown in terms of growth. But even during an economic downturn, you’re seeing the importance of that digital transition, of the cloud migration,” said Mogharabi.

From that perspective, then, the poor performance of AWS is a “massive disappointment” and shouldn’t be overlooked, Wedbush analyst Dan Ives told CNBC. “AWS has really been the Rock of Gibraltar for Amazon. This is really a seminal moment for [CEO Andy] Jassy and Amazon to get through.”.

Funds in focus: Global X Cloud Computing ETF

All three of Alphabet, Amazon and Microsoft are held by the Global X Cloud Computing ETF [CLOU], though none are in the top 10 holdings, making up just 5.74% of the portfolio, as of 27 October. The fund is down 37% year-to-date, but up 1.4% in the past month.

The story is similar for the Simplify Volt Cloud and Cybersecurity Disruption ETF [VCLO], where the three companies have been allocated a total 0.06% of the portfolio. The fund is down 58.3% year-to-date and down 10.1% in the past month. 

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Continue reading for FREE

Latest articles