- Cloud growth slowed QoQ, sparking investor worries
- Demand remained strong, but capacity constraints remain an issue
- Capex spending on new data centers is set to explode in 2025
Alphabet may have posted nearly $100 billion in revenue in Q4 2024 but skittish investors zeroed in on one metric that apparently failed to pass muster: cloud growth. The figure fell five percentage points quarter over quarter to 30%. But hear analysts tell it, the market is making much ado about nothing.
In fact, they said, the cloud growth rate is just one piece of a much larger, much more positive puzzle.
For what it’s worth, Alphabet’s Google Cloud division wasn’t the only cloud service provider to see a deceleration at the end of 2024. Revenue growth from Microsoft’s Azure and cloud services also dipped sequentially from 33% to 31%. So you can almost see why investors are panicking. Almost.
But as analysts pointed out, cloud growth didn’t slow because of a lack of demand or the much-feared bursting of the artificial intelligence (AI) bubble. Rather, the issue was on the supply side.
“We are nowhere near a slowdown,” New Street Research’s Pierre Ferragu and team wrote in a research note following Alphabet earnings.
So, what the heck happened? Basically, Alphabet and Microsoft can’t keep up with the orders rolling in.
“We do see and have been seeing very strong demand for our AI products in the fourth quarter in 2024,” Alphabet CFO Anat Ashkenazi explained on the company’s earnings call. “We exited the year with more demand than we had available capacity. So, we are in a tight supply-demand situation, working very hard to bring more capacity online.”
Microsoft’s CFO Amy Hood similarly said on the company’s earnings call last week that the company’s cloud growth was constrained by available capacity.
Data center business is booming
Across the board, hyperscalers are racing to add compute. Speaking during Microsoft earnings, CEO Satya Nadella noted the company has “more than doubled our overall data center capacity in the last three years” and added more capacity in 2024 than any other year in its history.
This trend is poised to not just continue, but accelerate further. Microsoft has already laid out plans to spend $80 billion on data center expansions in its fiscal 2025, while Alphabet said it expects to spend $75 billion on capex this year, with most of that going toward servers and data centers.
As Ferragu noted, “Total hyperscale capex expectations [for 2025] rose 12% to ~$315bn, with Amazon yet to report.” New Street Research counts Meta alongside Microsoft, Google and Amazon in its hyperscale category.
“Expectations are on track to reach the $350bn by year-end, which would make room for Nvidia to 2024 expectations increased achieve $200bn in datacenter revenues,” Ferragu added.
Indeed, Dell’Oro Group on Wednesday predicted worldwide data center capex will grow at a 21% compound annual growth rate to top $1 trillion by 2029, with accelerated servers for AI potentially accounting for half of this total.
The firm also raised its spending forecast for data center physical infrastructure (aka, cooling, racks and power equipment). It previously tipped the market to grow to more than $50 billion by 2028 but now said it expects revenue to reach $61 billion by 2029.
Founder Tam Dell'Oro said the bump accounted for 2024 results and accelerator shipments which exceeded expectations. She added that demand has expanded to Tier 2 cloud service providers and “governments and Tier 1 telecom operators are [also] becoming involved in enabling data center expansion.”
You can read more about that last point here, here and here.