Microsoft Corp. and Google owner Alphabet Inc. sent a clear message to investors on Thursday: our spending on artificial intelligence and cloud computing is paying off.
The companies beat Wall Street estimates with their latest quarterly results, which were boosted by a surge in cloud revenue – fueled in part by the growing use of AI services. That sent the companies’ shares surging in late trading, with Alphabet rising as much as 17% and Microsoft gaining 6.3%.
The tech titans are locked in a fierce battle for dominance in artificial intelligence, with Microsoft joining forces with startup OpenAI to challenge Google’s two-decade stranglehold on internet search. But Thursday’s results showed there is plenty of room to grow for both companies.
Silicon Valley has hailed 2024 as the year when companies will start deploying generative AI – technology that can create text, images and videos based on simple cues. In back-to-back earnings calls, executives from Alphabet and Microsoft said the programs are generating more revenue for their cloud computing units.
Enterprise customers are more open to long-term investments in their cloud infrastructure, says Tejas Dessai, research analyst at Global X ETFs. This has helped make the sometimes volatile sector more reliable.
“These revenues from Microsoft and Google clearly show that demand for cloud infrastructure is starting to normalize,” Dessai said. “The fundamental cloud infrastructure is showing healthy growth.”
The rising demand for cloud computing comes as a welcome turn for Google, which has acquired Amazon.com Inc. and has long left Microsoft behind on the market. After breaking even for the first time last year, Google’s cloud business posted a profit of $900 million in the first quarter – well above analyst forecasts of $672.4 million. The unit is seen as one of Google’s best opportunities for growth as its core search advertising business matures.
“For years, Google Cloud has tended to be a weak spot during Alphabet’s earnings calls,” said Lee Sustar, chief analyst at Forrester Research Inc. “These latest results show that Google Cloud’s AI offering not only made business customers take a second look, but also spend some serious money.”
Google’s success with business customers follows some embarrassing setbacks in the consumer market. In February, its flagship AI model Gemini was roundly criticized after it spit out historically inaccurate images, prompting the company to stop generating images of people.Play video
The business side of the market was a completely different story, said Thomas Kurian, CEO of Google Cloud. The professional version of Gemini comes with several controls to help marketers ensure content remains consistent with their brands. The service can be used to produce advertisements, fend off cyber threats, and even create videos and podcasts.
“We are very excited about the benefits of AI for our cloud customers,” Chief Financial Officer Ruth Porat said Thursday. “We saw an increasing contribution from our AI solutions.”
For Microsoft, generative AI allows the company to command more spending from its key enterprise customers. Chief Executive Officer Satya Nadella has equipped Microsoft’s entire product line with AI technology from partner OpenAI. The bet is starting to pay off: some customers are adding AI tools that summarize documents and generate content. They also sign up for Azure cloud subscriptions with OpenAI products.
Microsoft said revenue from its Azure cloud computing platform rose 31% in the quarter, exceeding analyst expectations. About 7% of that increase was attributable to AI, up from 6% in the previous quarter, and Microsoft is pleased with customer adoption so far, Chief Financial Officer Amy Hood said in an interview.
“You’re seeing healthy growth across Azure, in the non-AI and AI services, which is important,” Hood said. “While it is still early days what the long-term monetization potential of AI will be, we feel good about where we are today.”
Microsoft’s GitHub coding platform is also gaining traction, registering 1.8 million customers during the period, up from 1.3 million last quarter. Powered by OpenAI’s large language model, the AI Coding Assistant helps streamline developers’ work by predicting lines of code, answering questions, and converting code from one programming language to another. Business subscribers range from small startups to large corporations such as Goldman Sachs Group Inc., Ford Motor Co. and Ernst & Young.
The company also sees a promising first rollout of an AI assistant intended to work with its Office software. The new tools cost companies an additional $30 per month on top of existing subscriptions. Nadella told analysts that nearly 60% of Fortune 500 customers use Copilot.
Not everyone reporting earnings on Thursday had good news to report. Intel Corp. gave a lackluster forecast for current quarter sales and earnings, sending shares tumbling in extended trading. The chipmaker expects sales to pick up again in the second half of the year.Play video
Microsoft and Alphabet had to deliver strong performances to avoid scaring investors, who bought shares of Meta Platforms Inc. on Thursday. after the Facebook parent company said during Wednesday’s earnings results that it would invest billions of dollars more than expected in AI. Alphabet spent $12 billion on capital expenditures this quarter, about double the total from last year’s quarter, and Porat told investors to expect similar spending for the rest of the year. After investing $14 billion in capital expenditures during the quarter, Microsoft said expenses will continue to rise.
“We see the demand for AI continuing to grow, so we will continue to work to meet it,” Hood said.