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Following the recent technology stock sell off and ahead of cloud enterprise software giant SaleForce.com (CRM) earnings let us revisit the CapEx spending with the major technology companies for data centers and cloud needs from their earnings calls.

Cloud Infrastructure

Alphabet announced in their earnings release said their cash capital spending rose 49% annually in Q3 to $5.28 billion which CFO Ruth Porat attributed to both "data center construction projects in flight as well as ongoing expansion in [Google's] compute capacity." The consensus is for Alphabet's capex to rise 75% this year to $23 billion.

Facebook during it's Q3 call lowered its 2018 capex budget to a range of a $14 billion to $14.5 billion from the prior target of $15 billion. Despite this lowering capex will be more than double from  $6.7 billion in 2017. Facebook forecast its capex will rise to a range of $18 billion to $20 billion in 2019. CFO Dave Wehner suggested investments in server capacity used to support Facebook's feed and ad-ranking algorithms are playing a big role. Wehner noted Facebook is spending more to support Asian markets where it's still seeing healthy user growth.

Amazon's capex growth is driven in large part by Amazon Web Services (AWS) and grew strongly during much of 2017. In Q3 it rose just 3% annually in Q3 to $2.33 billion after a 14% drop in Q2. This could also be a part of Amazon being top dog, the others playing catch up, CFO Brian Olsavsky said that running the data centers more efficiently is the reason for theslowdown in data center capex growth.

AWS architecture

Microsoft Is reported that its capex rose nearly 60% annually to $4.3 billion but forecast that forecast capex will be flat sequentially in Q4 and reiterated capex growth will "moderate" in fiscal 2019 (ends in June 2019) from a fiscal 2018 rate of slightly over 30%. CFO Amy Hood noted  Microsoft Azure's geographic footprint growth is contributing to its capex growth.  

Over in China Alibaba and Tencent are growing capex strongly, but off smaller bases meaning there will also be more real estate and content license purchases in the earlier phases. Alibaba's capex rose 39% annually to $1.81 billion. Tencent capex rose 71% to $862 million.

Intel's Data Center Group (DCG), which includes sales of server CPUs and other data center products, saw its sales to cloud service providers rise 50% annually in Q3.  Itt cautioned DCG's cloud sales can't be expected to grow 50% forever, INTC hinted cloud demand remains solid.

Nvidia's Datacenter segment includes sales of server GPUs and hardware to cloud providers, announcedrevenue of $792 million, which was just below analyst expectations, but was stillr 58% annual growth. NVDA has been adjusting from the collapse of the cryptocurrency market and the affect it had on the company was bigger and faster than expected. NVidia stock was down over 50% off it's all time highs by Friday Novemeber 23, a dramatic collapse in price. The large cloud giants are investing heavily in GPU-accelerated hardware that's used to train AI/deep learning algorithms and is also seeing sales of GPUs used to run those trained algorithms against real-world content pick up.

Arista Networks is a major provider of data center switches to the cloud companies and in Q3  it announced 29% revenue growth and issued in-line Q4 sales guidance. Arista's CEO Jayshree Ullal suggested demand from "cloud titans" remains strong, albeit while cautioning Arista's sales to these firms "don't track one-to-one" with their capex.

Also as a result of the crypto collapse hard drive makers are seeing cloud orders stall. Western Digital in October warned on a "temporary slowdown" in hard drive demand from "large cloud service providers." WDC also forecast demand would only get better in the second half of 2019.

Competitor Seagate warned it saw a "digestion cycle" begin for cloud-related hard drive purchases during the September quarter, and STX said its "best estimate is that [the cycle] may last for up to three quarters." A recent plunge in NAND flash memory prices is also weighing, by making solid-state drives (SSDs) more price-competitive with hard drives.

Research firm DRAMeXchange recently forecast NAND prices will get another fresh double-digit sequential drop in Q4. Overall despite the carnage in the tech market cloud capex trends remain healthy, caution however if a company as tuned in as NVidia can mis read the crypto headwinds this is at best a shakey outlook.

Spending in 2018 was at extremely elevated levels, so a fallback is expected. We have still increasing demands for cloud infrastructures by secular trends such as public cloud service adoption and online video consumption, AI and algorithms.

From The Traders Community Research Desk

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