Analysts and investors speculate that cloud migrations may slow and reduce chip demand.

Cloud and data centers are the chip industry’s strongest sector, but cloud infrastructure could be chipmakers’ next problem, according to a report in Reuters.

Signs are showing growth could slow in what has been a pillar during the COVID era as consumers signed up for cloud-based entertainment and companies retooled their offices, the article says.

Analysts say the cloud market has rarely had to weather a prolonged economic downturn since it rose to prominence in the last decade as more businesses adopted the technology, Reuters further explains. This, in turn, makes it harder to predict whether it’s recession-proof or will be hit by an economic downturn.

As 40-year-high inflation weighs on consumers and economists debate recession signals, advertisers have been tightening their purse strings, big tech companies say.

“Investors are worried it’s the next shoe to drop”, commented Bernstein analyst Stacy Rasgon, adding that an advertising drought hurting the likes of Facebook and Snapchat could spur cutbacks in data center investments.

The big three cloud providers see revenue shrink

Big tech reported slower annual cloud revenue growth rates this earnings season. Alphabet’s Google Cloud dropped over 8 percentage points, Microsoft’s Azure dropped 6 percentage points, and Amazon’s AWS dropped over 3 percentage points compared with the previous quarter.

The three companies have also said they will keep data center equipment longer, in some cases up to six years from three, to save money. “If they’re going to be cutting back their spending on data center capacity, well that’s fewer chips from Intel or AMD”, said Glenn O’Donnell Research Director at Forrester Research.

The trouble’s cause isn’t as simple as slower cloud growth, Micron executive Sumit Sadana told Reuters. Part of the problem was a shortage of some chips holding up servers from being built, leading to a pile-up of other chips — a situation similar to the auto chip shortage.