Cloud Warning Signs Grow
Follow the money. Despited a meteoric rise in the shares of some hot cloud companies this year, many macro trends, including capital spending (capex) from the large cloud provders and service providers, appears to indicate that infrastructure spending is slowing.
Let's set aside the volatile China question for the moment. There are many signs that enterprise and cloud spending is slowing and that many of the shares of technology companies that have built in huge multiples are starting to fall.
Several areas, cloud monitoring and communications tools and networking infrastructure, appear to be weakening based on earnings results and data from recent earnings reports.
NetApp Fail
First up: Infrastructure. A negative announcement from NetApp (NTAP) was one of the big red flags of the quarter. NetApp reduced its revenue forecast by 12% to $1.22-1.23B. The company combined self-blame with macroeconomic factors. NetApp CEO George Kurian said a degrading macroeconomic environment represents the bulk of its first fiscal quarter 2019 revenue and income shortfall.
"These large accounts are spending considerably less in total Capex this year compared to calendar year '18," Kurian said. "In the past several years, we've had a focus on growing in our top global customers. We've made great progress in some but need to do more to expand our share in a broader set of these customers."
Wall St. analysts are reacting. Simon Leopold over at Raymond James recently trimmed his earnings estimates for a host of enterprise and cloud infrastructure stocks, including Cisco, Dell, Nutanix and Pure Storage. NetApp was a key driver of these downgrades, said Leopold.
New Relic Tanks
Another interesting area to follow is cloud monitoring and communications companies, which forms a large part of the cloud ecosystem. Many of these companies have been a part of the recent crop of Initial Public Offerings (IPOs). Application monitoring company Dynatrace (DT) recently had a $550M IPO and shares popped about 50% over the offering price. Cloudflare, a security and content delivery network provider, recently filed forms indicating it will soon pursue an IPO.
Meanwhile, despite the euphoria for the IPOs, New Relic (NEWR) got crushed in Wednesday, dropping 30% after reporting disappointing sales for the fiscal quarter ending. June 30. It also gave weaker-than-expected guidance. The company now projects second-quarter revenue of $143 million to $145 million, a drop from the analyst consensus of $148.6 million. New Relic blamed part of the shortfall on a strategic reconfiguration of its product positioning and sales force.
Shares in cloud communications infrastructure company Twilio (TWLO) got hit after earnings on July 31 and have since fallen 10% since its earnings release. The company's results were roughly in line with analyst views -- it reported second quarter revenue of $275 million, with earnings of 3 cents per share. Analysts expected revenue of $264 million and earnings of 3 cents per share. But that wasn't enough to support the stock, which apparently was looking for a huge beat.
Twilio provided third quarter revenue guidance of $289 million on earnings of 2 cents per share. Consensus expectations were for revenue of $285.6 million on earnings of a penny per share.
What's interesting is that Twilio and New Relic, which both depend on the growth of cloud infrastructure to sell their wares, didn't seem to stress any broader cloud or macro-economic trends -- unlike NetApp. But at the same time, the trend in the largest Webscale players has been reporting decreases in technology spending. The big four cloud companies -- Microsoft, Facebook, Amazon, and Google) -- have all decreased capex in the last year. Recently, Facebook's capex came in about 20% below analyst estimates and Google was 10% below consensus.
Telecom Capex Slow
The telecommunications sector also appears to be as lackluster as it has been for years, despite the growing hype and enthusiasm for 5G rollouts. Verizon recently reported 2Q19 capital expenditures of $3.70B, below most analysts estimates of around $4.2 billion. That's down nearly 15% sequentially. Some may recall that telecom spending is a perpetual disappointment to some large networking vendors, particularly Cisco. So far there is no sign of the 5G wireless boom.
All in all, it's a messy picture -- but overall it appears that cloud capex and enterprise tech spending in general are being pulled back. This doesn't appear to paint a bright picture for the second half of the year.
