following last quarter’s earnings we published an analysis on cloud that showed hyperscalers were slowing 5 sequentially and bestofbreed was slowing 12 sequentially based on q4 guides what was most important for tech investors to realize is that this is out of character for cloud as q4 is typically the strongest quarter we concluded that this foreshadows a weakerthanexpected q1 and also a weaker fy2023 than was currently baked into estimates following the most recent earnings reports our prediction is playing out that the slowdown we had predicted would worsen after the current quarter results this is important because the cloud category has treated investors quite well with recurring revenue resiliency during covid and some of the strongest examples of productmarket fit available on the public markets however not even this can overcome the effects of lower budgets and cloud spend which is the top driver in terms of yearoveryear comparisons below we discuss the fundamental weakness apparent in the most recent earnings reports for our premium research members we are extending the analysis next week to include a few outliers that seem more resilient than others in the category and those that are definitively the weakest often times identifying one or two strong companies in a category and patiently waiting can pay off as the cloud category will put downward pressure on the stock price including the outliers our goal is to buy the outliers after they’ve been unduly penalized big tech competes with bestofbreed cloud companies in nearly every capacity for example although most think of azure when looking at microsoft’s earnings reports the company has a formidable presence in cybersecurity worth over 20 billion in revenue google’s bigquery is one of snowflake’s largest competitors as is amazon’s redshift i covered the differences between the three for forbes here we also made the following point about why the big 3 is an important proxy in our analysis “slowing growth in cloud stocks when will we hit a bottom” “the big 3 are the best proxy because their reports represent the layer in the tech stack that tends to be the most resilient in terms of churn the switching costs are quite high for cloud iaas services the big 3 also afford a more concentrated view by owning 66 of market share across three companies whereas saas is spread across thousands of companies” the slowdown over the past four quarters is quite visible   aws sales grew by 20 yoy to 214 billion in q4 down from 27 yoy growth reported in q3 and down from 33 yoy reported in q2   q4 2022 growth rate of 20was halved as aws sales grew by 40 yoy in q4 2021   aws revenue also missed the management guidance of 25 growth   guidance for q1 was not provided however it was stated the yoy growth rates in january were “in the midteens”   microsoft azure revenue grew by 31 yoy and was down from 35 in q3 in constant currency it grew 38 and beat the management guidance by 1   microsoft azure revenue grew by 46 yoy and also in cc basis in q4 2021   the management provided guidance of 30 to 31 growth rate for the march quarter down from 38 this quarter and down from 49 on a cc basis in the year ago march quarter   you may recall the 5point deceleration announced in the october report caused concern in the market this is technically a steeper deceleration   google cloud revenue grew by 32 yoy to 73 billion and was down from 38 growth in q3 revenue missed the analyst consensus estimates by 15   the growth rate was also significantly lower than last year’s growth down about 13rd when google cloud revenue grew by 45 yoy in q4 2021 what big 3 management teams are saying when there’s evidence of a deceleration analysts will typically ask the management teams to elaborate on the call with the idea of identifying how much more deceleration may be reported in the future and for how long … brian just any color on why midteens is kind of a holdable growth rate for aws over the next couple of quarters given what looks like pretty clearly continuing deterioration in enterprise demand so on the aws growth rate im not sure i can forecast for you with any level of certainty what is going to happen beyond this quarter you kind of this is a bit uncharted territories economically and as we mentioned theres some unique things going on with the customer base that i think many in this industry are all seeing the same thing  and whether theres short term perhaps shortterm belt tightening in the infrastructure expense by a lot of companies i think the longterm trends are still there and i think the quickest way to save money is to get to the cloud quite frankly” amazon’s management also volunteered the following in their opening remarks “starting back in the middle of the third quarter of 2022 we saw our yearoveryear growth rates slow as enterprises of all sizes evaluated ways to optimize their cloud spending in response to the tough macroeconomic conditions as expected these optimization efforts continued into the fourth quarter” they expect the optimization efforts to continue at least for the next couple of quarters and in the absence of proper guidance for q1 said that the yoy growth rates in january were in the midteens” per management “as we look ahead we expect these optimization efforts will continue to be a headwind to aws growth in at least the next couple of quarters so far in the first month of the year aws yearoveryear revenue growth is in the midteens” here’s what microsoft’s ceo satya nadella said in the first part of his opening comments “as i meet with customers and partners a few things are increasingly clear just as we saw customers accelerate their digital spend during the pandemic we are now seeing them optimize that spend also organizations are exercising caution given the macroeconomic uncertainty” later in the call the cfo mentions “as noted earlier growth continued to moderate particularly in december and we exited the quarter with azure constant currency growth in the mid30s” cloud will see belt tightening in 2023 and investors will have to gamble on the timing for when this turns around it could be in the next few quarters or it could take years most of this will depend on the economy as the common denominator for cloud stocks is budgets to be clear the category has the potential to be quite resilient which we covered in 2019 when we said “my prediction is this may be one of the last cycles when tech is considered less safe than value stocks as the market will find out the hard way cloud software is actually very safe it is insulated from trade wars and overseas manufacturing issues it reduces costs for enterprises which is ideal for a recession lastly cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech such as mobile ecommerce and advertising which are reaching saturation are finding themselves in the cross hairs of antitrust and are susceptible to consumer spending changes” there are a lot of cloud software bulls and for good reason this category has treated investors well with predictable revenue growth cloud software is resilient because it drives down costs and increases productivity we know this scenario well as we wrote about it many times in the past few years to defend cloud often cloud selloffs were welcomed to position for a 6month bounce back after the category sold off 40 or more i pointed this out in the past on the free side and reiterated here on marketwatchbehind paywall in 2019 ie when we weren’t facing a brick wall on growth the issue with this assumption is that cloud growth is actually slowing down that is the reality of things and this wasn’t true in 2019 and hasn’t been true in the last decade couple this with weak bottom lines that require cash injections and what get is a sector that is largely out of favor what analysts are saying about the big 3 institutional analysts are able to do channel checks it doesn’t hurt to see if there is more information available directly from large cloud customers here are some recent analyst notes bmo capital analyst keith bachman said until azure growth stabilizes the shares are likely to be range bound the firm believes there is too much remaining uncertainty on azure which represents about 31 of bmos revenue estimates piper sandler analyst thomas champion said that the alphabet’s q4 revenue and ebitda missed across the board with advertising trends slightly weaker than expected driven especially by network search growth also slowed and cloud growth decelerated 550 basis points he further said alphabet is transitioning the cost base for slower growth piper sandler analyst said that the amazon’s q4 results were mostly positive with revenues topping the high end of the guidance range however amazons guidance was slightly weak as consumers sound cautious and the cloud deceleration cadence appears to be landing in the midteens for q1 the analyst believes management comments suggest the company is still navigating a difficult stretch interesting enough dan ives lowered his price target on microsoft following earnings yet has raised the price target again recently stating … wedbush is seeing steady cloud enterprise spending for microsoft that has stabilized from the softness we saw in the month of december wedbush added that microsoft along with cloud competitors such as amazon amzn google goog oracle orcl and ibm ibm are seeing a surge of beltway cloud deal activity in 2023 with a major shift to cloud underway from the pentagon to civil agencies in the 202 area code to help illustrate how the deceleration is quite steep for some bestofbreed names we took a sample of the topranking cloud stocks on revenue growth free cash flow adjusted operating margin andor valuations among the bestofbreed cloud stocks only servicenow’s guide shows sequential growth the company’s qoq growth was 7 last year and is expected to be 8 this year the largest deceleration was in gitlab with revenue that grew 12 qoq last year is expected to decline 4 sequentially this year overall the category is slowing down sequentially a rather drastic 80 for q1 guides compared to the previous year from an average of 12 qoq last year to 2 qoq growth this year as stated in our previous analysis it’s assumed that h1 2022 was strong so yoy is less important than qoqyoy this is because the cloud slowdown happened later in the market cycle with first management comments appearing in q3 for example bestofbreed cloud reported a 66 slowdown in qoqyoy growth for q4 guides and is now guiding for a 80 slowdown in qoqyoy growth for q1 guides here is how this compares to last quarter when we were seeing a 23 slowdown from 17 to 5 when i stated “yet the q4 guidance is out of character as we see a 23 decline in average sequential growth rate from 17 to 5 this is the more severe drop off because q4 2021 was much better than q2 2022 in terms of the economy however my contention is that q4 could be reflecting what is to come in 2023 rather a reflection of budgets from 2022 as the slowdown is more pronounced in q4 than it has been in previous quarters from 2022” below is cloud’s price action since we last covered the weakness in this sector this is despite a surprisingly strong january and february for tech both billcom and gitlab saw weak price action compared to the others and coincidentally both saw sequential growth turn negative prior to the current earnings reports i spoke about billcom and gitlab specifically with samuel burke of real vision when i forecast there would be further weakness in this category many cloud stocks are on thin ice in this regard and i imagine that ifwhen more cloud stocks turn negative on a qoqyoy basis compared to last year weak price action will follow every investor must determine their personal risk tolerance the io fund noticed unusually weak fundamentals in cloud in q3 and reallocated our positions to other sectors within tech at that time however we are hard at work in determining the one or two cloud positions we’d like to buy when this category reaches a bottom we share our stock picks plus entries and exits with our premium members you can learn more here please note the io fund conducts research and draws conclusions for the company’s portfolio we then share that information with our readers and offer realtime trade notifications this is not a guarantee of a stock’s performance and it is not financial advice please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis the io fund and beth kindig own shares of microsoft the io fund has no intentions of changing their positions in cloud and do not have any intentions of buying or selling any stocks listed in this article within 72 hours of publishing if you would like notifications when my new articles are published please hit the button below to follow me