Public Cloud XI: Cost Savings Cycle Makes Way For Burgeoning Gen AI  

The TD Cowen Insight

Our 11^th annual survey of 680 U.S. respondents suggests a vast majority of cloud customers will finish cost optimizations by YE’23, setting up for additional workload transition. Generative AI workflows are ramping, with nearly 75% of respondents either highly considering allocating IT budget or have already allocated budget. Other insights include workload migration, multi-cloud, and lengthening contracts.   

TD Cowen 11th Annual Public Cloud Market Survey

Our 11^th Annual Cloud Survey provides an updated view on:  

• Public cloud spending trends, including pace of growth, where we are on the cost optimization curve for hyper-scalers, and potential impact of macro environment.  
• Gen AI current and future budget allocation and use cases.  

• Public cloud contract length.  
• Shift to multi-cloud vendors.  
• Workload migrations, among other areas.   

We surveyed 680 respondents comprising ~$9.5BN in IT spend; the sample was split evenly among SMB, Midsize, and Enterprise customers.   

Why is Public Cloud Spend Expected to Increase?

We view the major public cloud platforms mostly through cost optimizations that started in the middle of 2022. Per our survey, most cloud customers (or 76% of total who implemented cost optimizations) will likely finish their efforts by the end of 2023, while >50% finished by the end of Q3 2023.  

Key levers of public cloud spend growth going forward include:   

• 85% of cloud customers are committed to moving a significant amount or fair amount of workloads to the cloud in 2023 as a part of their recent cost optimizations. Top 3 workloads include AI inference and training, front office, and back office applications.  
• Gen AI adoption should be incremental to cloud spend. Approximately 75% of respondents are allocating spend or intend to allocate spend over the next year.  
• Macro conditions appear benign to cloud spend.   
• The shift to longer contracts and multi-cloud vendors continues.  

Public Cloud Revenue Forecast

Global public cloud market revenue of $488BN in 2022 is expected to rise to $1.16TN in 2027, a ~19% CAGR per Gartner. Meanwhile, Infrastructure as a Service (IaaS) is the fastest growing segment at a 23% CAGR between 2022-2027.  

On average, survey respondents expect their spend with public cloud providers to grow ~30% in 2023, down from 35% in 2022 (at the median). This growth gives us greater confidence in our forecasts for the big 3 hyperscalers. It also allows us to paint a more constructive picture than current investor sentiment. The data directionally shows the revenue deceleration we are seeing from the large public cloud platforms and led in part by heightened cost optimizations. However, we expect heightened cost optimizations to largely be over post 2023. The respondents’ expectation for spend growth deceleration aligns with our estimates of major public cloud vendors. For instance, we forecast revenue growth of ~15% y/y in 4Q23 vs +20% y/y in 4Q22 for the leading cloud provider.   

Overall, we are encouraged by upcoming growth levers, including more workloads moving to the cloud and investments in Gen AI.