Venture Capitalist at Theory

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2 minute read / Oct 28, 2022 /

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.

Microsoft Azure 50% 51% 46% 46% 40% 35%
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.

image 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.

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