Cloud Gathers Over Chip Makers

Cloud computing has been a rainmaker for the semiconductor industry, but there are still some dry patches.
 One seems upon the industry now: Intel Corp., one of the world’s largest chip makers, reported a drop in first-quarter sales for its data-center business and issued a sharp reduction in its forecast for the year. Much smaller Xilinx surprised investors a day earlier with its own disappointing data-center sales.
 Those results came just as Microsoft and Amazon. com—the two largest cloud service operators—reported notable slowdowns in capital spending for the March quarter. Analysts expect a similar trend from Google parent Alphabet Inc., which reports its results on Monday.
 The combined results have rained on the chip party’s parade. After getting drubbed last year, the PHLX Semiconductor Index had surged 38% this year prior to Microsoft and Xilinx reporting their results last Wednesday. That made chips the best-performing subsector in tech; Xilinx alone was up 64% for the year.
 But reaction to the latest news has been harsh. Intel’s shares slid 9% on Friday for their worst-single day decline in more than three years. Xilinx shed 17% following its own report, though the stock bounced back somewhat on Friday. The chip index, meanwhile, is down nearly 3% over the past two trading days. Investors shouldn’t panic.
 Demand for cloud-computing services remains strong, as evidenced by both Microsoft’s and Amazon’s recent reports. But cloud capital spending is unlikely to match last year’s explosive pace. RBC estimates it surged 48% last year compared with 25% in 2017. That was skewed by factors like mounting trade tensions with China, which spurred buyers to stock up ahead of potential tariffs or export controls last year’s third quarter.
 For their part, Microsoft and Amazon characterized their recent spending slowdowns as more a matter of digesting previous outlays. Microsoft’s capital expenditures fell 13% year over year in the March quarter after averaging 65% growth in the previous four periods. Amazon’s total capital spending rose 10% year over year—also a notable deceleration. Amazon added that “really impressive gains in efficiencies” have lessened its need to spend more in the near term.
 Intel and Xilinx both see the slowdown as temporary. But Intel in particular took an extra-cautious stance by cutting its full-year revenue projection by 3.5%. The chip maker also projected what will be the first annual decline for its data-center business in more than a decade.
 That may ultimately prove too cautious—cloud computing remains a priority among corporate IT executives. Even so, Intel and the chip industry in general could do with a much lower bar.  

—Dan Gallagher

Capital spending, by calendar quarter

*Includes capital leases
Source: the companies


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