Q4 earnings take, cloud business slowdown, and next week’s earnings

Is the high growth era of cloud over?

One the things that caused both Alphabet and Amazon to disappoint, and also recently Microsoft, was the disappointment in the cloud business which is seeing a significant slowdown in growth. In Q4 2016 the cloud business for Google, Amazon, and Microsoft was a combined $38bn annual revenue business and has grown considerably to a $188bn annual revenue business in Q4 2022. No wonder investors have been betting on these three companies. Cloud has made its inroad into the business world. The selling points have been easy to deploy the technology infrastructure, it scales fast, the up-time and IT security are always excellent. Recently several businesses are beginning to complain about the costs of cloud computing and the lack of transparency in the cost structure for using the three companies’ different machine learning applications on top of just the cloud infrastructure (computing power).

The general slowdown in enterprise technology spending is quite evident now in the cloud business of Google, Amazon, and Microsoft with the revenue growth getting a healthy boost during the pandemic hitting peak growth at 34% y/y in Q3 2021. This growth rate has since slowed to 18.8% y/y in Q4 2022 on a trajectory to the lowest annual growth since Q1 2017. It begs the question of whether the explosive growth of cloud computing is finally coming to an end and thus pulling a growth engine out of these major technology companies. The operating margin has also steadily been declining due to higher operating expenses from among other electricity which has become more expensive due to the energy crisis. While both Amazon and Microsoft are running very profitable cloud businesses, Google’s cloud business lost $480mn in Q4 2022 and improvement from the $1.7bn operating loss in Q1 2020, but still unacceptable from an investor point of view. The reason is most likely that Google is subsidising the cloud business from its ads business to keep prices low to get market share as Google is by far the smallest cloud business of the three.

Next week’s earnings focus: Walt Disney, Siemens, and Toyota

The Q4 earnings season is not over yet with 243 companies in the S&P 500 Index having reported earnings. Next week’s earnings calendar will provide plenty of information for investors to chew on. The list below highlights the absolute most important earnings to watch and out of those the three most key earnings are from Walt Disney, Siemens, and Toyota.

The entertainment giant Disney is expected to report revenue growth of 7% y/y and EPS of $0.76 up 21% y/y and a lot of focus will be on Nelson Peltz, the activist investor that has gone into the company, and his quest for higher streaming profitability and potentially changing the asset portfolio of Disney. Siemens, one of Europe’s largest industrial companies, is expected to show revenue growth of 11% y/y and unchanged operating income compared to a year ago as cost pressures remain a key challenge for Siemens. Last quarter the order book and net new orders looked healthy, so the question is whether this will flow through into the outlook for 2023. Toyota is expected to report revenue growth of 19% y/y as demand for cars have come back, but the real interesting focus point on Toyota is further details on the new CEO’s aggressive move towards offering many more fully electric vehicles rather than hybrids. Toyota has recently indicated that they have made errors in their technology bet and looking to aggressively invest in battery EVs.

• Monday: Activision Blizzard, IDEXX Laboratories
• Tuesday: Carlsberg, BNP Paribas, Siemens Energy, SoftBank Group, Nintendo, BP, Linde, Vertex Pharmaceuticals, KKR & Co, Fortinet, DuPont, Illumina, Enphase Energy
• Wednesday: A.P. Moller – Maersk, Vestas Wind Systems, TotalEnergies, Societe Generale, Deutsche Boerse, Adyen, Equinor, Yara International, Walt Disney, CVS Health, Uber Technologies
• Thursday: KBC Group, Brookfield, Thomson Reuters, L’Oreal, Vinci, Credit Agricole, Siemens, Toyota Motor, NTT, Honda Motor, AstraZeneca, Unilever, British American Tobacco, ArcelorMittal, DNB Bank, Volvo Car, Zurich Insurance Group, Credit Suisse, AbbVie, PepsiCo, Philip Morris, PayPal, Cloudflare
• Friday: Enbridge, Constellation Software