Video Transcript

Jason Ader, CFA
Equity Research Analyst
Co-Head, Technology, Media, and Communications

Over the past few quarters, we've seen a significant deceleration in cloud computing growth, specifically at large public cloud providers that rent servers and storage to customers who pay for what they consume, like traditional utilities.

While cyclical factors are clearly at play here, investors have started to wonder if more structural factors are also driving the cloud slowdown.

In other words, are the best days of cloud computing behind us? Do cloud providers face a more uncertain future where the low hanging fruit has already been picked and growth will be harder to come by?

Notwithstanding the current pressure points on cloud growth, our research gives us a more glass half full perspective on the outlook for cloud services over the next few years. Our optimism around the likely re-acceleration in cloud growth is based on three main points.

First, the elasticity of the cloud model means that consumption is likely to recover once the economy recovers. This elasticity is the whole point of the cloud model and why customers have flocked to it. You can scale your spending down when business gets tight, but when things improve, you can scale back up. This is not possible if you're running your own data centers.

Second, workloads continue to migrate to the cloud. We estimate that roughly 20 to 30% of all workloads now reside in the public cloud. So, we're still in the early innings of the shift. While some customers have extended their cloud migration timelines due to budget constraints, especially for Tier 1 apps that are harder to move. We're also hearing that many enterprises are taking advantage of the COVID pause to train their staff with public cloud skills.

Third, generative AI represents a giant net new workload for the cloud. While still early, we're starting to see a material impact here on cloud consumption as the large language models that services like ChatGPT are trained on require a ton of computing resources. Zooming out, we expect the public cloud infrastructure market to approach $250 billion in revenue in 2023.

And while growth will slow from the mid 20% level we saw in 2022, we still expect solid double-digit growth this year with the potential for re-acceleration once year-over-year comparisons get easier, the economy stabilizes and potentially rebounds, and, the new wave of generative AI starts to move the needle. Bottom line…don't bet against the cloud. It's still the future of IT.