- The coronavirus crisis and a widely-predicted economic downturn could hasten the ongoing shift to the cloud, Wall Street analysts say.
- Cloud platforms like Amazon Web Services or Microsoft Azure allow businesses to set up their networks on web-based platforms, and to scale down or abandon private data centers.
- But that could be bad news for tech giants, such as Oracle, HPE and Dell, with business models that still rely heavily on sales of hardware and software systems used for private data centers.
- While these tech giants have pivoted their business to the cloud, the faster shift could make it harder for them to make the transition, analysts say.
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Cloud computing was already a hot trend in enterprise technology even before the coronavirus crisis hit, but that shift could happen at a faster pace as the pandemic leads to what some experts predict will be a severe downturn.
And that could be bad news for traditional tech giants like Oracle, Dell and Hewlett Packard Enterprise that have embraced the cloud, but still rely on revenue from gear and software used for private data centers, according to Wall Street analysts.
CFRA analyst Aaron Siegel also told clients that it's "likely Covid-19-driven economic downturn will accelerate the shift to cloud computing."
The cloud lets businesses, including huge corporations, set up their networks on web-based platforms, allowing them to scale down or even abandon their servers and private data centers. The trend has typically led to huge cost savings which could make it even more attractive in a down economy.
But the trend has hurt tech giants that sell hardware and software used to maintain in-house data centers. These players have embraced the cloud, but analysts say the coronavirus crisis could make that transition tougher.
Siegel cited Oracle, one of the biggest vendors of business applications, as particularly vulnerable to a "faster shift to off-premise" systems.
Oracle has launched an aggressive bid for a stronger position in the cloud, which appeared to be gaining traction, another analyst said in a note after the company reported earnings last week.
"We think the firm is now closer to the long-awaited inflection point, where Oracle's high growth offerings start to more than offset its shrinking legacy product portfolio, although we wonder to what extent the COVID-19-related issues could push this out a few quarters," William Blair analyst Jason Ader said in a research note.
But Siegel sees a rockier road ahead for the tech behemoth, as he maintained a sell rating on the stock "due to our ongoing conviction that the shift to cloud is deflationary for Oracle as its shrinking license, maintenance, and hardware sales will detract more from total revenue than its growing cloud businesses."
Brad Gastwirth, chief technology analyst of Wedbush said he also expects "IT workloads will continue to shift towards the cloud."
"We see significant risk for traditional providers of IT hardware," he told clients in a note, citing HPE, Dell and NetApp, which make gear and software used to run private data centers.
These companies have also pivoted aggressively to the cloud. HPE and Dell, for example, have introduced programs that allow customers to pay only for the computing power they use, rather than buying whole hardware systems.
But their businesses are still heavily exposed to non-cloud focused markets.
"We see this trend as generally positive for cloud vendors and their supply chain," Gastwirth said. "We see legacy hardware vendors as particularly poorly positioned given limited to no cloud exposure."
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