WSS: More misguided sentiment around where the sector is headed as earnings season kicks off with solid results so far
Another busy week followed the collective freak-out over Chinese startup DeepSeek releasing a new AI chatbot. The development will continue to be at the forefront of discussions and debate about the sector’s demand profile and trajectory. We published more commentary on this in the past week, featuring thoughts from Appleby Strategy Group CTO Daniel Golding, who also talks about the state of data centre demand and supply and how a confluence of events could be restarting the clock. Stops and starts, and shifts in the alignment of demand and supply, with the industry recalibrating on the fly, is a normal pattern and underscores the need to take a long-term view of what is happening. We delve into things in more detail.
Earnings season has kicked off and speaking of collective freak-outs, there was again a proliferation of overreaction. A number of headlines talked about Microsoft, Google and AWS seeing ‘slowing’ cloud computing growth, while again raising concerns that huge CapEx investments are going to translate into a massive over-build in short order. Here is one headline in advance of Amazon’s earnings report last week, which articulates puzzling sentiment to say the least: ‘Amazon’s cloud business faces crucial test after rivals Microsoft, Google stumble’. Stumble? Microsoft Azure and Google Cloud are still growing over 30% y/y at significant levels of scale. Yes, the quarterly y/y growth rates are slightly down from 3Q24, but the drops were slight and not anywhere outside the norm. The commentators and analysts fail to realize that a miss on an enterprise deal that gets pushed into a future quarter can move the needle, while supply constraints are having an impact as well (Oracle Cloud reported demand exceeding supply as well). The demand profile remains strong and management teams emphasized this. These are short-term challenges and bumps that are part of the typical cycles and phases that the sector goes through. Stumbles? A crucial turning point in the road? Hardly. These headlines need to be summarily ignored and dismissed.
The media and analysts, for some time now, are getting bent out of shape over the rapidly increasing CapEx numbers that the hyperscalers, along with Meta, are disclosing on earnings calls. The numbers are climbing as they push into this next wave of hyperscale growth and the advent of AI. There are questions being asked and unwarranted panic that an overbuild situation is going to emerge .. you know .. just like the one that was supposed to happen in 2022 coming out the pandemic when demand was going to subside. And the glut that was supposed to emerge amid a number of points in the hyperscale cloud wave over the last decade. Seems like that did not transpire either. The CapEx investments are long-term and reflect a strategic technological inflection point that is far from speculative. CapEx is an excellent indicator for where expectations and strategic aspirations are given the various pockets of demand outpacing supply we are seeing, and there is no ‘data centre glut’ on the horizon. These fears often arise and again are the result of many taking a short-term, rather than long-term view of the sector.
Meanwhile, the sector continues to see movement from the energy space. Energy providers are looking at the demand coming from hyperscale and data centres, and are looking at how they can serve it. Renewable, lower-carbon alternative options that are detached from the grid and can run on-site and in close proximity to facilities are top of mind and that need is what energy companies are pursing. Chevron and ExxonMobil are two companies that are looking to build natural gas plants for data centres and shared plans in recent weeks. The need for energy is also driving strategic activity. Blackstone is an aggressive investor in data centres and acquired a power plant in Virginia and looks to serve what is still the largest data centre market in the world today.
To support everything that is being built, capital requirements continue to rise. In the past week, we saw Data4 raise capital for expansion across its portfolio, while Rowan Digital Infrastructure closed on construction financing.
We will of course have more on all these topics in the coming weeks and it will be at the centre of the discussion in Las Vegas at our annual executive summit infra / STRUCTURE. Some good news on that front: we have already opened registration with early bird pricing.
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