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Despite worries over consumer spending and as softness in spots in the enterprise arise, spending on cloud computing has been one of the bright spots in the tech sector.
That strength may be short lived, however.
Morgan Stanley analyst Erik Woodring said in a research report that hyperscaler companies in China, such as Alibaba (BABA), Baidu (BIDU) and Tencent (OTCPK:TCEHY), all noted delays in cloud projects because of the country’s COVID-related restrictions, with Alibaba (BABA) pointing out a decline in corporate activities and slowing of demand from Internet customers. Woodring said that if this weakness continues, it could materially impact spending on the cloud, notably capital expenditures related to the cloud. And such as situation could impact hard disk drives, or HDDs, and in particular, Seagate Technology (NASDAQ:STX).
Woodring said that lower-than-expected capital expense results from Chinese hyperscalers is in line with commentary that calls for softness in Chinese capex budgets, while “U.S. cloud spending is expected to be more resilient.”
It’s likely that spending among the Chinese hyperscalers sees some “softness” in the months ahead, and which could impact overall cloud spending. As a result, Woodring lowered his cloud spending expectations for the rest of 2022 to 26% year-over-year growth, compared to a prior outlook of 27% year-over-year growth.
Woodring added that while estimates indicate there should be a continued expansion of data centers for the cloud, there is “the potential for a slowing of spend should cloud demand wane,” which would impact certain companies in the cloud sector.
So far, the hyperscalers in the U.S., such as Meta Platforms (META), Google (GOOG) (GOOGL) and Microsoft (MSFT), have not cut their cloud spending plans. However, there have been concerns about about spending cuts coming from Meta (META) and Google, (GOOGL) as the two companies represent roughly 28% of Morgan Stanley’s capex tracker.
Woodring said that hard-disk drives make up roughly 90% of cloud data center storage, and that about 35% of Seagate’s HDD exabyte drives are sent to cloud hyperscalers.
Some have speculated that HDD makers have started to revise their build expectations lower, with expectations now for building 88 million high-capacity drives this year, down from a prior outlook of 90.3 million in April.
Woodring noted that historically, Seagate’s (STX) total revenue and HDD revenue “has been positively correlated to cloud capex, and the relationship is even stronger for the mass capacity business.”
However, if there is a slowdown at the four largest cloud customers in the U.S., then Seagate (STX) “could see an outsized impact if the large hyperscalers begin to revise down expectations,” Woodring warned.
Investment firm Susquehanna recently downgraded Seagate Technology (STX) on concerns over weaker demand next year.