The biggest takeaway from Microsoft's generally disappointing September-quarter earnings report is that spending on cloud computing is not going to be immune to an economic downturn.
The software giant said growth in revenue from its Azure public cloud computing business in the quarter on a constant-currency basis was 42%, a point below guidance, after a similar miss in the June quarter. Worse, Microsoft (ticker: MSFT) expects a further five-percentage-point deceleration in the December quarter to 37%. While still impressive growth by most standards, the Street didn't anticipate a slowdown of that magnitude, and the stock is paying the price, with a decline of more than 5% Wednesday morning.
The Microsoft news is spurring investors to take a hard look at software companies with consumption-based business models. Most enterprise-software companies either sell perpetual licenses—where you simply buy software outright, but pay maintenance fees over time—or offer subscription-based models, tied to the number of users in a given time period. But cloud-computing services tend to charge based on consumption, like utilities—the more you use, the more you pay. Improve efficiency, and pay less.
Microsoft noted on its post-earnings conference call that the softer Azure growth reflects efforts to help customers "optimize" Azure workloads. Citi analyst Tyler Radke writes that weaker Azure growth and the company's commentary on optimization "is a negative read-through" to other cloud companies with consumption-based business models, pointing to Snowflake (SNOW), MongoDB (MDB), and Elastic (ESTC) as potentially vulnerable.
As Radke notes, the company also called out the impact on its cloud business from rising energy costs, forecasting $800 million in incremental energy costs for the June 2023 fiscal year, but he sees that as a Microsoft-specific issue.
Stifel analyst Brad Reback likewise called out the risks to companies with consumption models, calling out the same names as Radke, along with Amazon.com's (AMZN) Amazon Web Services, and Datadog (DDOG). He sees risks, as well, for DigitalOcean Holdings (DOCN), which he also thinks is vulnerable to elevated energy costs.
Guggenheim analyst John DiFucci wonders if Microsoft is seeing some impact on pricing from increased competition from Oracle (ORCL), which is trying to muscle into cloud computing's top tier along with Microsoft, AWS, and Google Cloud.
"We recently attended Oracle CloudWorld where Oracle management discussed their ability to sell OCI [Oracle Cloud] at half the price at superior performance relative to similar AWS services," DiFucci writes in a research note reviewing the quarter. "We assume Azure services are priced similarly to AWS'."
While recent strong results from both International Business Machines (IBM) and SAP (SAP) support the notion that enterprise spending will be resilient even in an economic downturn, Microsoft's disappointing report suggests that there will be few places to hide. "Winter is here," writes Wolfe Research analyst Alex Zukin. "It's coming for everyone and no software vendor will be left unscathed."
Shares of Amazon, which reports third-quarter results after the close of trading on Thursday, are down 3.8%. Among the cloud-software pure plays, Datadog is down 3.5%, Snowflake is off 1.8%, and Digital Ocean and MongoDB are both about 1% lower. Elastic is actually up 1%, and Oracle stock has spiked 2.8%.