PUBLISHED FRI, APR 29 202212:05 PM EDT
By Jordan Novet on cnbc.com
Central banks lifted interest rates to tamp down inflation in the first quarter, and a hot war broke out in Europe. Those shifts have been weakening demand across some parts of the economy.
But several of world’s largest technology companies have a business buffer against those threats: cloud computing.
The practice of running computing applications remotely for clients, in football field-sized data centers, is booming. That trend continued in the first quarter, with Amazon, Google parent Alphabet and Microsoft all reporting higher-than-expected cloud revenue, and it demonstrated the advantage of diversifying away from consumer-oriented businesses.
Amazon: Cloud drives profits
Although Amazon Web Services makes up only 16% of the e-commerce giant’s revenue, it grew 37% from a year ago and it’s immensely profitable, carrying the business through these hard times.
Customer demand for online shopping remains strong, but inflation is increasing Amazon’s costs, and executives are aware of how higher prices could affect household budgets, Brian Olsavsky, Amazon’s finance chief, said on an earnings conference call with analysts on Thursday. But even if consumer demand slackens, Amazon’s cloud business is more profitable than ever before, showing operating profits of $6.52 billion, up 57% from a year ago. The rest of its business pulled an operating loss of $2.85 billion, swinging from a $4.70 billion operating profit in the year-ago quarter.
Microsoft: IT spending remains strong
Of the big five technology companies, the one with the greatest emphasis on commercial customers is Microsoft. It derives 47% of its revenue from the business-oriented Microsoft Cloud segment that includes Azure, the company’s AWS competitor, along with commercial subscriptions to Office 365 productivity software. Overall, Microsoft’s revenue from Azure and other cloud services, including cloud services from recently acquired speech-recognition software maker Nuance Communications, rose 46% in the first quarter.
CEO Satya Nadella struck a bold note on the resilience of Microsoft in a more volatile economy during a call with analysts on Tuesday.
“If there is any macro headwind, where you have more value for less price means you win,” he said. “And in our case, when it comes to our commercial cloud offerings, we have significant advantages on that across the stack.”
From Nadella’s perspective, companies delivering cloud services to help companies modernize might benefit if conditions worsen.
“In the conversations we are having with our customers, the interesting thing I find from perhaps even past challenges, whether macro or micro, is I don’t hear of businesses looking to their IT budgets or digital transformation projects as the place for cuts,” he said. “If anything, some of these projects are the way they’re going to accelerate their transformation or for that matter automation, for example.”
Google: Not profitable, but growing
Google, with its 80% revenue concentration in advertising, can be swayed by big-picture economic patterns. It was in 2020, when the arrival of the coronavirus pushed advertisers to pull back, prompting the first revenue decline in company history. In addition to missing out on revenue in Russia after the war broke out, Google saw less advertising spend on YouTube in Europe, Ruth Porat, Alphabet’s finance chief, said on Tuesday’s conference call with analysts. Overall, Google ad revenue grew 22% in the first quarter.
“Looking forward, we see the volatile macro environment as the top risk to digital advertising overall (& Alphabet specifically in forward quarters),” Goldman Sachs, which has a buy rating on Alphabet stock, wrote in a Wednesday note to clients.
But the Google Cloud business, which contains Google Workspace productivity software as well as the Google Cloud Platform infrastructure division, was a bright spot, showing growth of 44%. Unlike AWS, Google’s cloud segment still doesn’t make money. But it trimmed its operating loss in the first quarter to $931 million, from $974 million in the same quarter one year ago.
Sundar Pichai, Alphabet’s CEO, sounded hopeful about cloud computing on the call alongside Porat.
“We are scaling up, particularly in our go-to-market as well, and I think that will play out well,” he said. “And over time as we focus on converting bookings to consumption as well, I think it will play out well, taking a long-run view and methodically scaling up and executing better.”