Two of the most prominent tech companies – Microsoft and Google parent Alphabet – reported earnings on Tuesday that told different stories about their cloud businesses, which some analysts see as a proxy for future artificial intelligence profits. This is because artificial intelligence requires a lot of computing power, which is usually only available through the cloud.
Artificial intelligence has been hailed as Silicon Valley’s next big revolution since newcomer OpenAI launched ChatGPT nearly a year ago. However, exactly how this translates into a windfall remains hotly debated.
Alphabet ranks third in cloud computing market share, behind Microsoft and Amazon. Missed analysts’ expectations Cloud revenue caused Alphabet shares to plunge 9%. At the same time, Microsoft’s stock price soared 4% on Tuesday, exceeding analysts’ expectations.
Microsoft did not respond to a request for comment, while Alphabet declined to comment, stating wealth Transcript of Tuesday’s earnings call.
Microsoft performs better than expected
LSEG’s analyst survey showed that Microsoft’s total quarterly revenue was US$56.5 billion, nearly US$2 billion higher than expected. Analysts were particularly impressed by the cloud unit, which accounted for 43% of the company’s total revenue and grew 19.4% compared with the same period last year. This part of Microsoft’s business includes the Azure cloud computing platform used by enterprise customers. Much of the growth in this area is due to Microsoft’s rapid integration of artificial intelligence into its cloud computing services and its entire technology stack.
Dan Ives writes: “More than 50% of Microsoft’s installed base will eventually use AI capabilities in the enterprise/commercial space, representing a significant monetization opportunity that we are now seeing play out as the year ends. role.” Managing Director of investment firm Wedbush.
A large part of Microsoft’s advantage in the field of artificial intelligence comes from its cooperation with OpenAI, and Microsoft’s investment in this field is estimated at $13 billion. One of the cloud products offered by Microsoft is Azure OpenAI, a service that allows software developers to integrate OpenAI models into their applications. Microsoft said it has 18,000 customers this year, up from 11,000 in July. “Higher-than-expected artificial intelligence consumption contributed to Azure revenue growth,” Microsoft Chief Financial Officer Amy Hood said on Tuesday’s earnings call. Microsoft did not disclose Azure revenue, which is the overall cloud business. Subset.
On Tuesday’s investor call, Microsoft also said it has about 1 million paying subscribers for its GitHub CoPilot, which uses artificial intelligence to help programmers write code. (Microsoft acquired GitHub for $7.5 billion in 2018, largely to bolster its suite of enterprise-focused tools.) These customers “pay a premium for their subscriptions,” said Paul, a longtime tech investor and business professor at The Citadel, a military academy. Paul Meeks said. University of South Carolina. This “gives investors confidence that (Microsoft) can monetize AI. So it’s a 1-2 positive surprise: incremental AI confidence and Azure superior performance/acceleration.”
During an earnings call, Microsoft CEO Satya Nadella attributed the company’s success to the widespread adoption of artificial intelligence to date. “We have deployed our AI services in more regions than any other cloud provider,” Nadella said.
Google still lags in cloud, but has advertising ace
As for its overall business, Google’s revenue for the quarter grew 11% to $76.9 billion, beating analysts’ expectations by just over $700 million.
Although Alphabet’s cloud business numbers look strong Missed Wall Street’s predictions. Revenue in this segment was $8.4 billion, up 22% from the third quarter of 2022 but below expectations of $8.6 billion. So far in 2023, cloud segment revenue has grown 26% to $23.9 billion.
Cloud computing performance was worse than expected, disappointing investors and causing Alphabet’s stock price to plummet 8.8%. Meeks said he was “surprised by how poorly the reaction to Google’s report was” and that it could be a buying opportunity for investors. Even turning a cloud business loss of $1.7 billion in the third quarter of 2022 into a profit of $852 million in the same period of 2023 was not enough to appease investors skeptical of Google Cloud’s performance.
“If you want this stock to continue to go higher, you have to make the cloud more profitable,” said Lee Munson, chief investment officer at Portfolio Wealth Advisors. CNBC Tuesday. “This is a third-rate cloud platform. We need to see it make money.”
Alphabet Chief Financial Officer Ruth Porat sought to separate the company’s business performance from Wall Street’s forecasts. “We feel comfortable with where we are and going forward, we’ll let you Make predictions.”
Some analysts prefer to focus on Google’s advertising business, which accounted for 78% of the company’s revenue as of the third quarter of 2023. Advertising sales grew 4% during the same period. One of the highlights is the growth of TikTok competitor YouTube Shorts, which Alphabet CEO Sundar Pichai said has reached 70 billion daily views, an increase of nearly 20 billion from the beginning of this year.
Although Google’s cloud business is growing slower than expected, analyst Ives remains optimistic about Google. He said that holding Alphabet stock to support its cloud business misses the point. “Owning Alphabet’s cloud business is like supporting Michael Jordan playing baseball,” he wrote in an analyst note.
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