Cloud giants again making it rain

Combined capital expenditures at Google, Amazon and Microsoft recover from a slowdown.

  • By Dan Gallagher,
  • The Wall Street Journal
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Big Tech didn't keep its wallet closed for long.

After a pause during the first half of the year, combined capital spending by Google (GOOGL), Amazon.com (AMZN) and Microsoft (MSFT) jumped 27% year over year to a record $18.9 billion in the third quarter. That number reflects significant spending increases at Amazon and Google parent Alphabet Inc. (GOOG), while Microsoft’s capital bill actually registered a slight decline in the period. Still, capital investments for all three were up by an average of 14% on a trailing 12-month basis for the period ended in September.

While the three have very different core business, they are all big in cloud-computing services. In fact, they are the three largest providers of those services, which are increasingly relied on by more companies. This requires huge upfront investments in data centers, which has turned Amazon, Google and Microsoft into three of the world’s largest buyers of components such as chips.

Therefore, a recovery in their spending is a boon for chip investors in particular. Intel Corp. (INTC) shares jumped 8% last week after the company reported surprisingly strong results for its data-center business. Advanced Micro Devices' (AMD) shares have risen about 4% since Intel’s report, ahead of its own results Tuesday afternoon.

However, for the tech giants themselves, growing capital bills aren’t warding off signs of deceleration. Amazon’s AWS revenue grew 35% year over year to $9 billion—its slowest growth on record. Likewise, Microsoft’s Azure revenue grew 59% year over year in the third quarter compared with 64% three months earlier.

These are still remarkable growth numbers, but the businesses are now large enough to require each company to chase bigger and bigger deals to keep them up. That could weigh on profitability. Walt Pritchard of Citi wrote in a note Tuesday that chasing large deals will keep all three companies in investment mode and “de-prioritizing margin expansion.”

But it is a race none can afford to let up on. AWS has significantly boosted Amazon’s overall profitability and growth, while Microsoft’s cloud efforts have rescued the company from the scrap heap of aging tech giants. Google’s cloud business is relatively small for now, but it still represents its best hope at diversifying away from dependence on advertising. And with nearly $141 billion in trailing 12-month operating cash flow between the three, there is plenty of potential spending to go around.

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