Morgan Stanley's view on the US stock market in 2024: Cloud business - Is the adjustment in place? Is "computing power leasing" becoming a trend?

Over the past year, tech giants have been adjusting their cloud businesses.

This year, Alibaba has postponed the spin-off plan for Alibaba Cloud and stated that it will adopt an AI-driven strategy with a focus on public cloud. Tencent's founder and CEO, Ma Huateng, has set the direction for Tencent Cloud's strategic development. JD Technology Group has started operating JD Cloud as an independent business unit. Amazon, Microsoft, and Alphabet-C's cloud businesses have all been squeezed by the slowdown in IT spending, sending a somewhat pessimistic signal.

When will the cloud business finish its adjustment period? When can it expect growth?

According to a report released by Morgan Stanley last week, a survey conducted in April showed that most cloud businesses are still in the adjustment phase and will end in the third and fourth quarters of this year. The latest survey, however, shows that the end date of the adjustment period has been delayed.

Morgan Stanley believes that the current adjustment is laying the foundation for future development, and artificial intelligence will bring greater acceleration potential to the cloud business in the second half of 2024 and 2025.

Review of 2023: Extended adjustment period for cloud business, but performance is stabilizing

From the perspective of the overall market, the performance of cloud businesses is stabilizing, bringing them one step closer to a renewed acceleration.

A survey of chief information officers (CIOs) conducted in April showed that most cloud businesses are undergoing adjustments and are expected to continue until the end of this year. The optimization mainly involves optimizing current workloads, integrating suppliers, and reducing SaaS seats.

In the latest CIO survey conducted in October, we found that the optimization period has been extended, but there are still almost the same number of business projects planned for adjustment, and this part of the optimization period is also expected to be extended. Considering the main forms of cloud business adjustment, more experimental projects will be closed and project migration speed will slow down.

However, the results of the cloud adjustment work are largely reflected in the performance. Although we are still in the early stages of migrating new projects/workloads to the cloud, the trend of slowing cloud business growth has basically stopped.

Outlook for 2024: AI as the Biggest Driver of Cloud Business Growth, but Not Until the Second Half of Next Year at the Earliest

According to Goldman Sachs, "AI" will be the biggest driving force behind the accelerated development of cloud computing, but this may not happen until the second half of 2024 or even 2025.

Goldman Sachs' survey in April also indicated that after cloud optimization, more than half of the workload of artificial intelligence is expected to be migrated to the cloud.

Another finding is that the performance growth of cloud business is mainly reflected in Microsoft's Azure business. Microsoft's latest quarterly earnings report showed that cloud business revenue did not slow down as expected by the market, but maintained double-digit growth momentum - Azure and other cloud services revenue grew by 29% in the third quarter, three percentage points higher than expected. Goldman Sachs pointed out:

Our latest CIO survey also shows that the majority of people want to place AI in public/hybrid clouds, which supports our initial survey results.

We predict that in the next three years, half of the incremental workload in cloud computing will come from artificial intelligence, and more and more customers will want to process workloads on public clouds in the long term.

Goldman Sachs pointed out that the biggest challenge for the growth of cloud business at present is that the investment in artificial intelligence projects is expected to see substantial growth in 2024 or even 2025.

As pointed out in our latest CIO survey report, AI projects are expected to yield results no earlier than the second half of 2024. The survey shows that only 21% of CIOs expect AI projects to yield results in the first half of 2024, and AI projects are more likely to yield results in the second half of next year, which also allows time for further adjustments in cloud business.

The accelerated transfer of workload to the cloud center may not begin until AI projects truly land in the second half of next year.

Microsoft and Alphabet-C to be the Two Major Beneficiaries

Goldman Sachs believes that the beneficiaries of cloud business are extending downstream, which also largely conveys the signal that cloud business may "re-accelerate".

Given their expertise in the field of AI, we believe that Microsoft and Alphabet-C will harvest the largest market share; the beneficiaries will extend further downstream; and the challenged suppliers are still mainly upstream technology providers.

Our survey also shows that cloud business-related software management, operational maintenance, and communication vendors can also benefit from it, such as SAP, Snowflake, Datadog, MongoDB, Confluent, F5, Nutanix, and Palo Alto Networks.

In the long run, whether it is the trend revealed by the CIO survey or our belief, over time, on-premises vendors will gradually lose market share. This is most evident in HPE and NetApp. In the next three years, software vendors such as Red Hat, Oracle, and VMware will also face more opportunities for loss.

According to the report by Morgan Stanley, there are two potential catalysts for the growth of cloud business:

• The adoption/use of artificial intelligence is being promoted.
• Subsequent CIO surveys are turning positive, and the environment for IT spending is improving.