Grey Skies in Cloud Earnings
I’m watching public company earnings to identify early weaknesses in the software market. This week Microsoft, Google/ Alphabet, & Amazon reported their third quarter figures.
|Company||Q-4 CAGR||Q-4 CAGR||Q-3 CAGR||Q-2 CAGR||Q-1 CAGR||Q0 CAGR|
|Google Cloud Platform||46%||54%||45%||51%||35%||38%|
|Amazon Web Services||37%||39%||40%||40%||33%||27%|
The meaningful decline in growth rates started four quarters ago is hard to ignore.
Let’s put these figures into context. Infrastructure revenue growth averaged 33% this quarter, which is astounding considering we’re talking about businesses that sum to more than $50b of revenue per quarter.
Customers spent $12b more this quarter. At a 7x multiple of revenue, that is another $84b of market cap creation, in theory.
But, the change in slope is meaningful, too. A year ago, these business units grew at 44% annually. The current recession is evident in the charts: growth rates have declined by 25% in six months’ time.
The kink downwards in the red line at Q-2 shows a sudden deceleration in AWS’ growth rate. GCP is more volatile, likely driven by the volatility of bigger deals closing on a smaller revenue base. Meanwhile, Azure has declined in a more steady cadence.
The data suggests a broader slowdown in software spending as these companies are indices of software buyers’ behavior.
Public software multiples - 4.9x as of last week, not far from the decade low of 3.3x - should depress further given these results & forward guidance. Microsoft stock is down 10%; Amazon fell about 20%; Google about 12%.
Lopping another 15% off multiples implies the median software company should trade at 4.2x forward revenues, a far cry from the 15x we observed not twelve months ago.