Dave Vellante's Breaking Analysis: Cloud optimization wanes as AI slowly lifts off

Introduction

After a brutal 2022 macro-economically and from a cloud optimization perspective, IT buyers are cautiously optimistic about spending in 2024. All hyperscalers are reporting that cloud optimization is slowing, although pockets of cloud cost-cutting remain. While AI gets all the headlines, its contribution to revenue is still a small fraction of the overall spending pie. We estimate Microsoft's AI services accounted for around $800M this past quarter. But the trajectory for AI services and the potential uplift looks promising for all four hyperscalers. We think collectively the generative AI uplift in cloud will surpass $10B this year.

Cloud spending amidst macro headwinds

The past twenty-four months have seen cloud spending face dual headwinds of macroeconomics and the ability to dial down resources as needed -- cloud optimization. Nonetheless, the big four hyperscalers clocked in between $170 - $190B in IaaS and PaaS revenue last year depending on how you factor the leaked court documents suggesting Azure is much smaller than previously believed. Regardless, hyperscaler growth continued to outpace almost all markets, accelerating between 18-19% in revenue terms last year, despite their enormous size.

As we progress into 2024, IT decision-makers are cautiously optimistic about spending levels, especially for the second half. All hyperscalers report that cloud optimization is slowing, although pockets of cloud cost-cutting remain. While AI gets all the headlines, its contribution to revenue is still a small fraction of the overall spending pie.

The AI uptake

For example, we estimate that Microsoft's AI services accounted for around $800M this past quarter. But the trajectory for AI services and the potential uplift looks promising for all four hyperscalers. We think collectively the generative AI uplift in cloud will surpass $10B this year.

Cloud spend by platform

IT decision-makers anticipate a 4.3% growth in technology budgets for the year, which is an improvement from the 3.5% growth seen in 2023 and higher than the 3.8% expectation from October. However, the forecasts for 2024 are back-loaded, with Q1 2024 forecasts at 2.4%, indicating that the optimism is concentrated in the second half of the year.

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Intel Foundry

As an American, you can't help but root for Intel CEO Pat Gelsinger to succeed. His vision to bring semiconductor manufacturing leadership back to the United States is more than just a quaint nationalistic sentiment. Rather, it's a strategic imperative for the country, its military, global competitiveness, and access to future technological innovations in the AI era. But his strategy is dependent upon the success of Intel both as a designer and a leading manufacturer of advanced chips.

The sixth data platform

We believe the future of intelligent data apps will enable virtually all organizations to operate a platform that orchestrates an ecosystem similar to that of Amazon.com. By this, we mean dynamically connecting and digitally representing an enterprise's operations, including its customers, partners, suppliers, and even competitors. This vision includes the ability to rationalize top-down plans with bottom-up activities across the many dimensions of a business: demand, product availability, production capacity, geographies, etc. Unlike today's data platforms, which generally are based on historical systems of truth, we envision a prescriptive model of a business's operations enabled by an emerging layer that unifies the intelligence trapped within today's application silos.

AI breakthroughs

Artificial general intelligence, or AGI, has people both intrigued and fearful. As a leading researcher in the field, last July, OpenAI introduced the concept of superalignment via a team created to study scientific and technical breakthroughs to guide and ultimately control AI systems that are much more capable than humans. OpenAI refers to this level of AI as superintelligence. Last week, this team unveiled the first results of an effort to supervise more powerful AI with less powerful models. While promising, the effort showed mixed results and brought to light several more questions about the future of AI and the ability of humans to control such advanced machine intelligence.

Winners and losers in the AI battle

Conventional wisdom says Microsoft is the big winner in the recent OpenAI saga. We don't quite see it that way. Both Microsoft and OpenAI are in a worse position today than they were last Thursday, prior to the firing of OpenAI CEO Sam Altman and the ongoing public drama that ensues. Microsoft and OpenAI had a huge lead in market momentum, AI adoption, and feature acceleration and were setting the narrative in AI.