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Dell’Oro previews Q3 data center CapEx assessment for major cloud providers

In wake of recently announced 3Q23 industry results, in an email to this publication, Dell’Oro Group senior research director Baron Fung shared a preliminary assessment of his firm’s analysis of data center CapEx for the top four cloud service providers (SPs) – i.e. Amazon, Google, Meta, and Microsoft – as well as for the rest of the market.

Per Dell’Oro’s research, data center CapEx for the top four cloud SPs grew by only an estimated 1% year over year in 3Q23, in another consecutive quarter of low single-digit growth.

Fung noted that, among the four cloud giants, that growth was mixed, with Amazon and Meta undergoing a “CapEx digestion cycle,” and Microsoft and Google still undergoing expansion cycles.

Dell’Oro Group projects that, unchanged from its prior forecasts, data center CapEx growth for the top four cloud SPs will taper to mid-single digits for the full year of 2023.

Notwithstanding, Fung noted that the extent and timing of digestion cycles will differ for each of the top four cloud providers.

AI-Selective Data Center CapEx Allocations Are Trending
Fung confirmed that, as opposed to general-purpose computing, the hyperscalers have recently been allocating their CapEx more selectively toward AI-related investments.

He added that Dell’Oro anticipates data center CapEx from the top four US cloud providers to trend moderately higher in 2024, with Amazon and Meta returning to higher growth levels, amid a normalization in spending on general-purpose compute.

Fung emphasized that data center CapEx is a portion of the companies’ reported total CapEx, composed of spending on: servers; networking equipment such as Ethernet switches, routers, optical transport systems, and interconnects; data center construction and physical infrastructure equipment.

He noted, “Each type of CapEx, including CapEx on general-purpose and AI-related infrastructure, may have a different timeline, and varies among the cloud SPs.”

Major Cloud Providers’ Q3 Data Center CapEx Highlights
As reckoned by Dell’Oro’s analysis and related by Fung, among the top four cloud SPs, Amazon’s data center CapEx declined by double digits year over year in 3Q23, as the company entered a CapEx digestion phase.

“Slower AWS cloud revenues may affect this downturn,” noted Fung.

He added, “Amazon is increasing investments in self-built accelerators, but the lack of major data center regions in the pipeline limits expansion. Expect higher spending in 2024.”

For its part, Google’s data center CapEx was seen to increase slightly in 3Q23, lower than expected due to timing issues, as stated by the researcher.

However, Fung noted that Google is emphasizing accelerated computing for its services, and is expected to experience double-digit growth in 2023.

Meanwhile, as recorded by Dell’Oro, Meta’s data center CapEx decreased double digits year over year in 3Q23 as the company streamlined its infrastructure for AI.

Fung observed that Meta is currently shifting to a modular architecture and outsourcing workloads to conserve capital.

Finally, Dell’Oro’s analysis saw Microsoft’s data center CapEx grow significantly in 3Q23, exceeding expectations, per Fung’s assessment.

He added that Microsoft plans to expand its data center footprint amid its continuing investment in AI.

Sluggish Enterprise Spending Persists
Fung said that as his firm awaits 3Q23 earnings results from data center system vendors, Dell’Oro expects another quarter of sluggish growth for the enterprise market — extending a downturn that has transpired since the beginning of the year.

In the analyst’s view, results announced by most of the major server and storage component vendors suggest that while the ongoing inventory corrections for general-purpose computing may have passed the low-point, the recovery for components is happening at a cautious pace.

Why so? Given that global cloud spending will not likely be significantly higher next year, Fung said a great deal of uncertainty surrounds the enterprise recovery next year.

Data Center Chips and Components Outlook
Fung said that, in general, Dell’Oro saw server CPU demand trending moderately higher in the third quarter, aided by server refreshes for the latest Intel Sapphire Rapids and AMD Genoa -based platforms.

The analyst added that memory vendors are experiencing some momentum in the transitioning of DDR5-based platforms, while HDD vendors are still encountering demand weakness related to excess inventories.

However, according to Fung, “everything related to accelerated computing for AI applications remains strong from a compute, networking and physical infrastructure standpoint.”

Dell’Oro expects supplies for NVIDIA GPUs to remain tight in the coming year, with viable alternative platforms from AMD and Intel possibly providing some relief to the market.

Fung noted that Dell’Oro’s newly added “Data Center IT Semiconductors and Components” report will provide more insight into cloud and enterprise server and storage system deployments.

The report will cover server components such as: CPUs, accelerators including GPUs, FPGAs and custom AI chips; as well as storage drives, memory, and network adapters.

Dell’Oro Group plans to publish its full 3Q23 Data Center CapEx report in December.

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