Dell'Oro: Supply Constraints Tighten Grip on Data Center Growth

Data center capex grew at its fastest rate in three years during the first quarter of 2022, but emergent pockets of lower cloud services demand and greater chances of stunted economic growth could threaten the industry’s momentum, according to Dell’Oro Group. Data center capex grew at its fastest rate in three years during the first quarter of 2022, but emergent pockets of lower cloud services demand and greater chances of stunted economic growth could threaten the industry’s momentum, according to Dell’Oro Group. “The possibility of slower economic growth is growing,” and with enterprise IT spending generally correlated with economic growth, that doesn’t bode well for cloud providers, Dell’Oro Research Director Baron Fung wrote in an email to SDxCentral, citing cloud service providers’ increasingly conservative attitudes toward IT investments. Atop that, supply chain disarray and ongoing uncertainty related to the war in Ukraine and further lockdowns in China will likely continue to affect semiconductor sourcing, production, and logistics going forward. Industry supply constraints add further complexity to this issue by hiding the lessened demand for cloud services due to lengthy backlogs yet to be addressed, Fung explained. “It’s possible at some point in which we see some order cancellations or inventory correction,” he added. However, Fung noted even considering a future economic downturn, the industry’s shift toward multicloud and hybrid cloud models will allow hyperscalers like Google, Amazon, Microsoft, and Meta to continue expanding their operations in 30 new regions this year as planned. The industry in general is also shifting to newer server architectures that will foster revenue and capex growth as new applications enter the scene, Fung said. “Data center capex grew double-digits year over year in (Q1) 2022, despite persistent supply chain constraints,” he said in a statement. “We anticipate further upside in data center capex later this year, as the (top four) cloud service providers expand their services and as server memory prices trend higher.” For example, the increased adoption of accelerated computing servers, like those with artificial intelligence (AI) chips or GPUs, increase the cost of those servers. And recent and future server platforms like Intel’s Sapphire Rapids “will increase server content with more cores, memory, etc.,” Fung said. Dell’Oro anticipates this will lead to jumps in server and memory costs later this year and give the industry’s capex another boost. Although Fung expects growth to be fueled by high capacity expansion and equipment refresh, supply issues show no signs of letting up, which may cause some spending planned for this year to transfer over to 2023, he explained.