Report: U.S. hyperscale cloud capex declines a bit in Q3

Morgan Stanley Research said capex took a slight dip for AWS, Microsoft and Google. (Pixabay)

While AWS, Microsoft Azure and Google have seemingly been printing their own money when it comes to their success in the cloud, their capital expenditures are tapering off a bit, according to Morgan Stanley Research.

Using its cloud CapEx Tracker, Morgan Stanley Research found that third-quarter U.S. hyperscale cloud capex growth decelerated approximately 10 points from the first half this year to about 40% year over year, which Morgan Stanley said confirmed a "digestion period" period for cloud companies.

The cloud companies' respective capex numbers are still growing, but for now, not at the same pace. The tracker points to 14% growth in cloud spending in 2019, a deceleration from 28% in 2018. Morgan Stanley Research looks at 14 companies that its analysts believe have the highest predilection for cloud IT infrastructure investment.

"Component vendors weakness and 3Q cloud capex growth of approximately 40% among U.S. hyperscale cloud companies—Amazon, Microsoft, Google and Facebook— confirmed our expectations for a deceleration after about 50% year-over-year growth in the first half of 2018," according to the research note.  "Our tracker now points to an eight point year-over-year acceleration in 2018 followed by 14 point deceleration in 2019.

"The trend is similar on an average and median basis, where we also see a deceleration to mid teens growth in 2019 as capex growth slows to digest excess memory purchases in the first half of 2018 after supply shortages in 2017."

Morgan Stanley analysts expect a further deceleration in U.S. hyperscale spend in the fourth quarter to 35%, and see the digestion period lasting into 2019. Morgan Stanley's report said that history suggests cloud digestions last between two and four quarters, and its analysts will look towards four quarter results and 2019 guidance to firm up their expectations.

Morgan Stanley said cloud demand remains robust, suggesting that the cloud capex slowdowns are temporary. Public cloud companies continue to report strong revenue growth with AWS up 46% year-over-year in the third quarter while Azure a 76% increase in the same timeframe. Morgan Stanley estimates for the four largest public cloud providers—which includes Alibaba—point to cloud revenue growing at a 42% CAGR through 2020.

"We expect a continuation of strong cloud growth after reaching the 20% adoption according to our CIO Surveys, which is historically an inflection point for new technologies," report said. "Overtime cloud capex growth should improve to support the robust demand for cloud services.

"Despite the recent slowdown, the long term cloud capex pipeline looks strong. We've picked up several anecdotes that suggest the pipeline for cloud data center build outs remains strong, though timing is unclear."

Google said on its third-quarter earnings that it's currently in different stages of development for 20 new data centers globally, according to the report. Apple announced in January that it will spend $10 billion on U.S. data centers alone over the next five years. A Dell'Oro Group report said that Apple's planned data center build-outs suggest it will reach Tier 1 status in the next three years and be in line with Facebook's current server installed base.

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China cloud providers are also looking to expand their data center footprints, according to the report. Tencent has plans to expand outside of China and Baidu is expected to transition from colocation to company-owned GPU-centric data centers starting next year.

"These data points are healthy indicators of future data center spend and are bullish for data center exposed stocks," the report said. "However, given macro uncertainty and the slowdown in cloud capex, we believe investors will wait to see capex growth stabilize before discounting these future projects—which may take several quarters."

While the report didn't mention service providers, carriers such as CenturyLink, Verizon and AT&T are forging more relationships with cloud providers to extend their enterprise services into the cloud. Service providers will also become bigger cloud customers once 5G is rolled out at scale starting with islands of deployments next year.

Morgan Stanley analysts that took part in the Cloud CapEx Tracker report included Katy L. Huberty, Joseph Moore, Simon Flannery, Brian Nowak CFA, James E Faucette, Craig Hettenbach, Sharon Shih, and Daniel Yen.