Cloud slowdown could impact Seagate and other hard drive makers

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Despite concerns about consumer spending and as the business eases, spending on cloud computing has been one of the bright spots for the tech sector.

This force can be short-lived, however.

Morgan Stanley analyst Erik Woodring said in a research report that hyperscaler companies in China, such as Alibaba (BABA), Baidu (BIDU) and Tencent (OTCPK:TCEHY), have all noted delays in cloud projects due to the country’s COVID-related restrictions, with Alibaba (BABA) pointing to a drop in business activity and slowing demand from internet customers. Woodring said if this weakness persists, it could have a significant impact on cloud-related spending, including cloud-related capital spending. And such a situation could have an impact on hard drives or hard drives, and in particular Seagate Technology (NASDAQ: STX).

Woodring said the lower-than-expected capital spending results from Chinese hyperscalers are in line with comments calling for Chinese capital budgets to be soft, while “US cloud spending should be more resilient.”

Spending among Chinese hyperscalers is likely to see some “softness” in the coming months, which could impact overall cloud spending. As a result, Woodring lowered its cloud spending forecast for the remainder of 2022 to 26% year-over-year growth, down from an earlier expectation of 27% year-over-year growth. other.

Woodring added that while estimates indicate there should be continued data center expansion for the cloud, there is “potential for slower spending if cloud demand declines,” which would impact some businesses. of the cloud industry.

So far, hyperscalers in the US, such as Meta Platforms (META), Google (GOOG) (GOOGL) and Microsoft (MSFT), have not reduced their cloud spending plans. However, spending cuts from Meta (META) and Google (GOOGL) are causing concern, as the two companies account for about 28% of Morgan Stanley’s tracker capex.

Woodring said HDDs make up about 90% of cloud data center storage, and about 35% of Seagate’s HDD exabytes are sent to cloud hyperscalers.

Some have speculated that hard drive makers have started to scale back their build expectations, with now expectations for 88 million high-capacity drives to be built this year, down from a previous forecast of 90, 3 million in April.

Woodring noted that historically, Seagate’s total revenue and hard drive revenue (STX) “have been positively correlated with cloud investments, and the relationship is even stronger for mass capacity business.”

However, if there is a slowdown at the four largest cloud customers in the United States, then Seagate (STX) “could see an outsized impact if the large hyperscalers start to revise their expectations downward,” Woodring warned. .

Investment firm Susquehanna recently downgraded Seagate Technology (STX) due to concerns over weaker demand next year.

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