Regardless of worries over shopper spending and as softness in spots within the enterprise come up, spending on cloud computing has been one of many brilliant spots within the tech sector.
That power could also be quick lived, nonetheless.
Morgan Stanley analyst Erik Woodring mentioned in a analysis report that hyperscaler firms in China, akin to Alibaba (BABA), Baidu (BIDU) and Tencent (OTCPK:TCEHY), all famous delays in cloud tasks due to the nation’s COVID-related restrictions, with Alibaba (BABA) declaring a decline in company actions and slowing of demand from Web clients. Woodring mentioned that if this weak point continues, it might materially impression spending on the cloud, notably capital expenditures associated to the cloud. And akin to state of affairs might impression exhausting disk drives, or HDDs, and specifically, Seagate Expertise (NASDAQ:STX).
Woodring mentioned that lower-than-expected capital expense outcomes from Chinese language hyperscalers is according to commentary that requires softness in Chinese language capex budgets, whereas “U.S. cloud spending is anticipated to be extra resilient.”
It is seemingly that spending among the many Chinese language hyperscalers sees some “softness” within the months forward, and which might impression general cloud spending. In consequence, Woodring lowered his cloud spending expectations for the remainder of 2022 to 26% year-over-year progress, in comparison with a previous outlook of 27% year-over-year progress.
Woodring added that whereas estimates point out there ought to be a continued enlargement of knowledge facilities for the cloud, there’s “the potential for a slowing of spend ought to cloud demand wane,” which might impression sure firms within the cloud sector.
To date, the hyperscalers within the U.S., akin to Meta Platforms (META), Google (GOOG) (GOOGL) and Microsoft (MSFT), haven’t reduce their cloud spending plans. Nevertheless, there have been considerations about about spending cuts coming from Meta (META) and Google, (GOOGL) as the 2 firms signify roughly 28% of Morgan Stanley’s capex tracker.
Woodring mentioned that hard-disk drives make up roughly 90% of cloud knowledge middle storage, and that about 35% of Seagate’s HDD exabyte drives are despatched to cloud hyperscalers.
Some have speculated that HDD makers have began to revise their construct expectations decrease, with expectations now for constructing 88 million high-capacity drives this yr, down from a previous outlook of 90.3 million in April.
Woodring famous that traditionally, Seagate’s (STX) whole income and HDD income “has been positively correlated to cloud capex, and the connection is even stronger for the mass capability enterprise.”
Nevertheless, if there’s a slowdown on the 4 largest cloud clients within the U.S., then Seagate (STX) “might see an outsized impression if the massive hyperscalers start to revise down expectations,” Woodring warned.
Funding agency Susquehanna lately downgraded Seagate Expertise (STX) on concerns over weaker demand next year.