The Dell’Oro Group reported recently that growth in capital expenditure on data centers the by the top four cloud service providers stood at its lowest level in nearly two years as these companies reported their first quarter 2023 results.
“Data center (DC) capex for the Top 4 Cloud SPs grew an estimated 19% Y/Y in 1Q23, the lowest growth in seven quarters,” Dell’Oro said. Noting that 4 of the big players — Amazon, Google, Meta and Microsoft — are entering a digestion cycle and moving out of their expansion phase.
“We project DC capex growth for the Top 4 will taper to mid-single digits for the full-year 2023, unchanged from our prior forecast,” Baron Fung, senior director at Dell’Oro said. “The extent and timing of the digestion cycle for each Cloud SPs differs, with Amazon and Meta slowing spending significantly this year, while Google and Microsoft still growing moderately through this year.”
“Revenues for server components such as CPU, memory, storage drives, network adapters, have fallen sharply in the last several quarters as system vendors and Cloud SPs reduce their inventories in anticipation of reduced consumption in the cloud and enterprise markets,” the analyst said. “Given these cloud digestion cycles have typically lasted 3-4 quarters in prior periods, the component market could recover in 2H23, as system vendors and certain Cloud SPs resumes component purchases in anticipation of the next investment cycle in 2024,” he added.
Fung said that the data center capex digestion phase could be impacted by the ongoing macroeconomic downturn with enterprises looking to trim budgets, which will affect cloud service providers spending on data centers.
“AI applications, with generative AI in particular, will remain a key growth initiative in the near-term,” Fung noted.
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