Analytics It’s been a tough month for big tech. Meta, Alphabet, Microsoft, and Amazon Web Services (AWS) all reported slowing demand across their core businesses, made worse by a less rosy outlook.

With super customers and the cloud among the most voracious consumers of data center equipment, it might seem natural that this quarter’s results are going to be doom and gloom for suppliers. But while demand for computers and consumer electronics may be headed toward a cliff, that doesn’t seem to be the case yet for data center equipment vendors, says Dell’Oro analyst Baron Fung. record.

First, despite the weaker-than-expected results, cloud service providers and super-professionals continue to invest heavily in infrastructure. “Meta tends to continue to increase capex, especially if conditions look challenging,” Fong says, adding that despite a rough quarter for the social network, CEO Mark Zuckerberg hasn’t deviated from that strategy.

As we reported last week, Meta is in the middle of the infrastructure investment cycle as the company looks to build more headroom in its data centers. And they are not alone. Earlier this month, Oracle announced that it had added “tens of thousands” of Nvidia A100 and H100 GPUs to its public cloud.

Meanwhile, AWS, GCP, and Azure continue to bring new cloud regions online almost every month. “We’re seeing some slowdown, but again, these companies are looking at the longer term,” Fung said.

This is likely why chip makers such as AMD and Nvidia are so optimistic about the data center market, especially given the blows they are taking in the consumer space. Intel is still out here. On top of a 20 percent drop in revenue from this time last year, the company’s data center group fared worse, falling 27 percent year-over-year in the third quarter. But it’s worth noting that Intel’s latest Xeon CPU is now over 1.5 years old.

Fong points out that the imminent launch of Intel’s Sapphire Rapids Xeon family, which is expected to offer more core counts, may not provide any services to the company as customers delay picking up Intel’s set-up until it becomes available.

While Fong expects cloud and mega-scale spending to remain strong over the next few quarters, he expects things to slow sometime in 2023. However, that won’t be as a result of recession or supply chain issues. Instead, he argues, cloud providers are set to begin the normal digestion cycle — a period of lower spending and greater focus on implementation and optimization.

Battle Accumulation

Continued demand for data center equipment over the next few quarters is likely to fuel the already long sales backlog for vendors such as Dell, HPE, Lenovo, Supermicro, and others. But that doesn’t mean the data center market is out of the woods just yet.

“This backlog ranges anywhere from entire data centers being delayed to networking equipment, servers, and so on,” Fung says. “Customers are still really hungry to get their hands on the equipment.”

This backlog is unlikely to resolve itself until semiconductor core lead times improve dramatically, he explains, adding that it’s the small, low-value components that are causing the biggest problem for OEMs at this point in the semiconductor crisis.

Rather than being difficult to get hold of for CPUs, GPUs, or memory, the biggest difficulties come from things like metal-oxide-semiconductor field-effect transistors (MOSFETs), diodes, and capacitors, which are essential to building complete systems or peripherals. . Availability of one of these components can mean the difference between charging the system or not. The good news is that lead times for these ingredients are showing signs of improvement, dropping to just 26 weeks, according to a recent Susquehanna report, but that’s still far from the 10-14 weeks that analysts consider healthy.

This backlog, combined with higher average selling prices, is insulating OEMs from any economic disruption at least until the middle of next year, Fung says. “I’ve looked at previous economic cycles – the recessions in 2009 and 2000 – and in those periods, there’s always been a very sharp decline in IT spending. We expect a similar dip next year, but there’s just a really big slowdown in the buildup that’s masking public demand.”

However, that could change if IT customers, facing deteriorating economic conditions, start canceling orders. “We haven’t actually seen customers cancel anything yet. I think many are still holding orders, given the long lead time and unwillingness to lose their place in the queue,” he adds.

Heading into mid-2023, Fung expects this backlog to subside as supply and demand enter some semblance of balance, something that will likely come as a relief for those waiting months to replace critical equipment. ®

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