Micron (NASDAQ:MU) and others in tech are expecting a back half bounce back in cloud spending. But based on Arista Networks' (NASDAQ:ANET) comments, I think we saw that general level of spend in Q2 already. The second half bounce may be slight. That can disappoint tech investors.

I'll review the cloud customer comments on their own budgets along with their numbers.
 

What Did Micron Say About The Second Half?

Here's what they said about this coming quarter:

"Our cloud DRAM bit shipments grew sequentially in the fiscal third quarter, exceeding our expectations, and early trends suggest strong sequential growth for the FQ4."

Micron's calling for a nice pickup here and now.

But Arista said otherwise on their recent earnings conference call"

" I think we – you've all seen the capex reports and depending on whose capex you're talking about, they have all gone from double-digit growth to single-digit and some of them are negative. So you can expect that the new norm is no more double-digit growth and it's going to hover in the low single digits."

Arista's largest customer segment is cloud customers. They aren't seeing a big jump.
 

Let's Look At The Numbers

Here's the Capex numbers through second quarter just reported by the largest cloud customers.

Source: Company Earnings Reports, Elazar Advisors Estimates based on company comments below

I put my own expectations based on what the companies said, which I'll review.

The key point is that overall it looks like Q3 and Q4 can be up 10%-11% in capex putting all the numbers together. That's not such a big jump from Q2's 8%. So Q2 is what just drove the numbers. If Q3 isn't that much better than Q2 then we just saw what that second half pickup will look like. Not much.

Simple logic - 10%-11% isn't much larger than 8%. It's not the big back half that semi companies are hinting to.

But look at last year's Q3 and Q4 up 47-48% in total capex growth.

We are going to be nowhere near those levels.

So Arista saying growth rates are "going to hover in the low single digits" means don't expect big pickups from here.

And you see that in the numbers. So there's less capex to go around even if it's a little higher.

Look what else Arista had to say and this is what really hurt the stock in the after hours last week.

"I think you guys have been more aggressive than we have in our guidance."

Sell-side analysts are expecting a stronger back half and Arista is not.
 

And What The Cloud Titans Are Actually Saying

Here's some of the biggest cloud customers' comments about their own capex budgets on Q2 earnings calls and their outlook.

Microsoft (NASDAQ:MSFT)

This is Arista's most important customer, Microsoft on capex on their Q2 call:

"And we expect capital expenditures to be roughly in line with Q4 as we continue to invest to meet growing demand for our cloud services."

We pointed out the risks Microsoft posed to Arista in our last report, which predicted Q1's weak results and hinted to Q2's disappointment. We pointed out that Microsoft had one-time extra pull-ins into 2018 numbers which makes this year's growth rate tough for Arista.

You see above Microsoft is planning flat capex for Q3 next quarter. That does drive a 12% growth rate though.

Amazon (NASDAQ:AMZN)

Here's what Amazon said about capex:

"So we are starting to see as I mentioned in earlier calls that the investment will be stepping up in 2019, so started to see that in Q2."

Amazon's growth rates will start to accelerate.

Facebook (NASDAQ:FB)

Facebook is slowing their capex plans. Here's what they said on Q2:

"We are lowering our 2019 capital expenditures outlook to $16 billion to $18 billion, down from our prior estimate of $17 billion to $19 billion. Our capital expenditures are driven primarily by our continued investment in data centers and servers."

Google (NASDAQ:GOOG)(NASDAQ:GOOGL)

Google plans to slow capex "significantly."

Here's what they said on Q2:

"First, we expect the overall growth rate will moderate quite significantly for the full year 2019 vs. 2018. Second, in terms of the mix within technical infrastructure, we expect to see more of an uptick in 2019 in data center investments relative to servers in contrast to the ranking in 2018."

So let's conclude.

Amazon is picking up their capex spend. Microsoft is keeping their capex spend. Google and Facebook are slowing their capex spend.

So more companies are slowing their spend. But by the numbers the spend growth looks like it inches up.
 

Trade War

The focus of this report is capex. But needless to say the ongoing trade war issues can easily dent capex plans for the second half as well.

The heating up of trade tensions probably helped slow growth rates from 40s to 8%.

A trade war can cause a continued slowdown through dislocation of the supply chain and a backing off of end demand.

So the Q2 growth rate of 8% accelerating to 10%-11% may be at risk. That 2-3% acceleration is not that large to begin with but has risk.

So this second half jump people are expecting from cloud is questionable.
 

Conclusion

Arista sounds more cautious on capex. They had a good quarter and a decent guide but their commentary caused the stock to drop after their report. Their commentary called out slowing capex growth and aggressive estimates.

We see from the "cloud titan" comments themselves that the second half should be a little better but not a big change higher than Q2. A small change but not big. And that little better depends on how fast Amazon grows.

Micron's second half pickup depends on cloud picking back up. Cloud customers told you net-net they don't plan to pick up. The numbers show they may or may not. Arista says they won't.

So I don't think it makes sense to be aggressive on a second half pickup.

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