In a recently released quarterly report, tech behemoths Alphabet and Microsoft showed considerable profit upticks propelled by AI-powered cloud computing.
Microsoft’s shares experienced a noticeable bump, rising by 3%, underscoring its dominating prowess in the cloud domain. Conversely, Alphabet, Google’s parent company, saw its stock descend by 5% after the earnings were unveiled. Even though it surpassed the financial projections, this dip accentuates concerns over the somewhat languid progress of Google Cloud.
The Azure elevation
According to Reuters` coverage, Microsoft’s cloud segment, known as Azure, dazzles investors and market analysts. The platform’s revenue surged to $24.3 billion, surpassing the anticipated figure of $23.49 billion. This uptick represents 29% growth, which surpasses the projected 26.2% by market research firms.
Microsoft’s Azure impressed where Google Cloud disappointed and the reason behind the divergence looks to be in artificial intelligence. https://t.co/jkMFfzLarQ
— Barron's (@barronsonline) October 25, 2023
This success can be partially attributed to the tech giant’s strategic partnerships and collaborations, most notably with OpenAI. Having deeply integrated OpenAI’s trailblazing technology into its wide-ranging product portfolio, including Bing and Microsoft 365, the company has consolidated its foothold in AI.
Contrastingly, Google’s cloud segment painted a different financial story. The division saw its revenues climb by 22.5% to reach $8.41 billion for the quarter ending in September. Though an impressive figure in isolation, it marked the segment’s most modest growth over the last 11 quarters, falling short of the predicted $8.62 billion.
While Microsoft has harnessed its longstanding relationships to net bigger clients, Google has shifted its sights to burgeoning AI startups. This strategic pivot contributed to the current disparity in their cloud success narratives. Krishna Chintalapalli of Parnassus Investments remarked,
“Microsoft leverages its deep-rooted software ties, while Google is somewhat the new kid on the block, attempting to challenge the status quo.”
The capital expenditure curve
A deeper look into the companies’ capital expenditures reveals the disparity in their aggressive AI adoption. Microsoft ramped up its spending, with its Q1 fiscal expenses totaling $11.2 billion, up from $10.7 billion in the preceding quarter. This uptick marks the steepest since 2016, and forecasts suggest the trend will continue, possibly pushing the annual expenditure beyond the $44 billion threshold.
Google’s capital expenditure increased by 10.7% to $8.06 billion in the July-September window, year-over-year.
Prospects and projections
While Alphabet grapples with boosting its cloud business, Microsoft’s trajectory seems clear and promising. CEO Satya Nadella highlighted that nearly 40% of Fortune 500 firms are experimenting with the beta version of the “Copilot” AI service. This $30-a-month offering unveiling next month is anticipated to further entrench the company’s supremacy in the AI-powered cloud domain.
$MSFT | AI contributes a 3% boost to Microsoft's cloud business in Q3; CEO Nadella mentions 40% of Fortune 500 testing their "Copilot" AI service.
— Wall St Engine (@wallstengine) October 25, 2023
Despite the hurdles, all’s not bleak for Google. The tech titan is gearing up to roll out “Gemini” in 2023, a suite of expansive language models. “The preliminary results are highly encouraging,” shared CEO Sundar Pichai.
From an investment perspective, Microsoft trades at 28.5 times its estimated earnings for the coming 12 months. In comparison, Google’s parent Alphabet stands at 24.93.
The tussle for dominance in the AI-enhanced cloud computing sector continues to unfold. While Microsoft appears to lead the charge, buoyed by its early AI investments and strategic partnerships, Google is still in the race. As the cloud narrative progresses, it’ll be intriguing to see how these tech juggernauts evolve their strategies to capture the lion’s share of this booming market.