Cloud Capex Looks Poised to Grow Strongly in 2021

Supply chain reports point to an early-2021 pickup in cloud hardware spending, as does commentary from firms such as Intel, Micron and Western Digital.
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Though cloud capital spending is taking a breather right now, there are a lot of signs suggesting that spending will start growing again in early 2021.

In a note released on Monday morning, Mizuho Securities reported that Asian supply chain checks and talks with U.S. hardware OEMs pointed to a strong rebound in cloud server spending in the first quarter and first half of 2021, following a soft Q4.

Analyst Vijay Rakesh estimates that data center capex among internet/cloud giants (i.e., hyperscalers) could be up 10% to 15% sequentially in Q1. Facebook  (FB) - Get Report and Microsoft  (MSFT) - Get Report in particular were singled out as hyperscalers expected to strongly grow their capex in early 2021.

Facebook, it’s worth noting, has guided for total 2021 capex of $21 billion to $23 billion, well above expected 2020 capex of roughly $16 billion. This forecast covers not only expected hardware purchases, but also expected spending on things such as data center construction and real estate purchases.

Meanwhile, several major chip and component suppliers to the hyperscalers, including Intel  (INTC) - Get Report, Micron  (MU) - Get Report, Seagate  (STX) - Get Report, Western Digital  (WDC) - Get Report and Samsung, have also indicated that they expect hyperscaler demand to be strong in 2021, as they move past a current digestion period that’s following strong first-half orders.

“I think calendar 2021 is shaping up for a really good year for cloud [sales],” said Micron CFO Dave Zinsner during a recent Bernstein conference talk. “All of the cloud customers that we've heard from have talked fairly positively about their capex investments both for this year and next year,” he later added.

Seagate forecast on its Oct. 22 earnings call that its sales to hyperscalers, which were down sharply on a sequential basis during its September quarter, would rise sequentially during its next three quarters. Western Digital forecast that inventory corrections among its cloud customers would continue into the December quarter, but said that it’s more positive about expected 2021 demand.

Steady increases in the processing, memory and storage needs of major internet/cloud workloads -- everything from video streaming, to cloud infrastructure services, to complex search and news feed algorithms -- remains a tailwind for cloud capex. So does -- as Nvidia  (NVDA) - Get Report likes to stress -- continued growth in AI-related investments, both for training increasingly complex deep learning models, and using them to help power various services.

Also, as Samsung indicated, pending Intel and AMD  (AMD) - Get Report server CPU refreshes are likely to give cloud capex an early-2021 boost.

On its Oct. 22 earnings call, Intel forecast that its next-gen Xeon server CPU line -- it’s codenamed Ice Lake, and is the first to rely on Intel’s 10-nanometer manufacturing process node -- would begin seeing a volume ramp in Q1 2021. The company previously guided for Ice Lake to begin seeing volume shipments in Q4 2020.

On its Oct. 27 earnings call, AMD forecast its next-gen Epyc server CPU line -- it’s codenamed Milan, and will rely on AMD’s new Zen 3 CPU core microarchitecture -- will begin seeing volume shipments to cloud and “select” high-performance computing (HPC) clients in Q4, followed by broader OEM availability in Q1.

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