“Cloud computing is actually a spectrum of things complementing one another and building on a foundation of sharing.  Inherent dualities in the cloud computing phenomenon are spawning divergent strategies for cloud computing success.  The public cloud, hybrid clouds, and private clouds now dot the landscape of IT based solutions.  Because of that, the basic issues have moved from ‘what is cloud’ to how will cloud projects evolve.”

 Chris Howard,
Chief of Research
Gartner’s CIO Research Group, 2017

For the last 10 years, technology investment focused on the cloud.  Whether becoming part of the public cloud, care of Amazon, Microsoft, or Google, or part of a private cloud, controlled internally by a company, everything revolved around moving data and computing to the cloud.  This enabled growth in cloud computing at 25% – 50% per year, as companies sought to lower their technology costs and remain competitive.  From handling less than 10% of all computing loads in 2008, cloud data centers will process over 94% of all computing workloads and “compute instances” by 2021.  This move signifies a massive victory for cloud computing over traditional data centers.

However, this massive success represents a two-edged sword.  Once an area of technology captures 94% market share in a particular market, growth must slow to close to overall technology market growth of 3% to 5%, given the limited share gains possible and the significant share of overall capital expenditures represented by technology.  With the cloud over 80% of the market today, industry growth in 2019 already began to exhibit a slowdown.  According to Gartner Group, after growing ~25% in 2017 and almost 21% in 2018, growth is expected to slow to 17% in 2019, then slow further in 2020.  So far this year, vendors to the hyperscale cloud data centers reported a significant slowdown in volumes.  In semiconductors, both Intel and Nvidia reported a downturn in orders for their data center chips.  Optical vendors, such as Ciena and Applied Optoelectronics, also reported a pause in orders for the optical equipment.  This story finds itself repeated across all the various areas of the cloud oriented, technology supply chain.  And while the order pause should end by year end, as Amazon and Microsoft upgrade to 400 Gigabyte inside the data center, the Year 2021 and saturation rapidly approaches.

For the vendors that rode the cloud wave over the past decade, the wave appears close to cresting, with growth set to crash to industry norms.  And with the attention of Chief Information Officers (CIOs) moving to a new focus, given the maturation of their cloud infrastructure, incremental technology spending likely will move to security, AI, and other more critical areas. According to Gartner Group, Data Center Systems spending will grow only 1.6% in 2019 with overall IT spending up 3.2%. For cloud vendors who enjoyed 20%+ growth for a decade, slowing down to these industry norms will come as a shock to the system, requiring companies to rapidly adjust to little to no growth in revenue.  For the industry, 1 – 2 more good years appear left.  But after that, It Is Getting Cloudy Outside. (Data from Gartner Group public statements and Cisco Global Cloud Index White Paper coupled with Green Drake Advisors analysis.)

 

 

Confidential – Do not copy or distribute.  The information herein is being provided in confidence and may not be reproduced or further disseminated without Green Drake Advisors, LLC’s express written permission.  This document is for informational purposes only and does not constitute an offer to sell or solicitation of an offer to buy securities or investment services. The information presented above is presented in summary form and is therefore subject to numerous qualifications and further explanation.  More complete information regarding the investment products and services described herein may be found in the firm’s Form ADV or by contacting Green Drake Advisors, LLC directly.  The information contained in this document is the most recent available to Green Drake Advisors, LLC.  However, all of the information herein is subject to change without notice.  ©2019 by Green Drake Advisors, LLC.  All Rights Reserved.  This document is the property of Green Drake Advisors, LLC and may not be disclosed, distributed, or reproduced without the express written permission of Green Drake Advisors, LLC.