(Bloomberg) – Microsoft Corp. and Google owner Alphabet Inc. sent a clear message to investors Thursday: Our spending on artificial intelligence and cloud computing is paying off.
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Both companies beat Wall Street expectations in their latest quarterly results, as cloud revenue soared in part due to a surge in the use of AI services. In response, the companies' stock prices rose in late trading, with Alphabet soaring as much as 17% and Microsoft rising 6.3%.
Tech giants are locked in a fierce battle for supremacy in the field of artificial intelligence, with Microsoft teaming up with startup OpenAI to challenge Google's 20-year domination of internet search. But Thursday's results showed both companies have plenty of room to grow.
Silicon Valley is hailing 2024 as the year companies start implementing generative AI, technology that can create text, images, and video from simple prompts. Executives from Alphabet and Microsoft said in successive earnings conferences that the program is helping their companies expand their cloud computing divisions.
Tejas Desai, research analyst at GlobalX ETF, said corporate clients are willing to make long-term investments in their cloud infrastructure. This added further credibility to a volatile industry.
“If you look at the revenues of Microsoft and Google, it's clear that demand for cloud infrastructure is starting to normalize,” Desai said. “Fundamental cloud infrastructure is showing healthy growth.”
The rise in demand for cloud computing is a welcome development for Google, which has long lagged behind Amazon.com and Microsoft in the market. After achieving breakeven for the first time last year, Google's cloud business recorded a profit of $ 900 million in the first quarter. This was significantly higher than analysts' expectations for his $672.4 million. The division is seen as one of Google's best bets for growth as its core search advertising business matures.
“For years, Google Cloud has always been the underdog on Alphabet's earnings calls,” said Lee Suster, principal analyst at Forrester Research Inc. “These latest results not only make Google Cloud's AI services reconsider business customers, but also make them spend some serious money.”
Google's success with business customers came after some embarrassing setbacks in the consumer market. In February, the company's flagship AI model, Gemini, was heavily criticized for spewing out historically inaccurate images, prompting the company to stop generating depictions of people.
According to Google Cloud CEO Thomas Kurian, the story on the enterprise side of the market is quite different. Gemini's professional version comes with a variety of controls to help marketers ensure content and brand consistency. The service can be used to create ads, avoid cyber threats, and even create videos and podcasts.
“We're really excited about the benefits that AI will bring to our cloud customers,” Chief Financial Officer Ruth Porat said Thursday. “We are seeing a growing contribution from his AI solutions to our company.”
For Microsoft, generative AI means it can squeeze more spending out of its core business customers. CEO Satya Nadella is injecting AI technology from his partner OpenAI into Microsoft's entire product line. This bet is starting to pay off, with some customers adding AI tools to summarize documents and generate content. He has also signed up for his subscription to Azure Cloud, which features OpenAI products.
Microsoft announced that revenue for its cloud computing platform Azure rose 31% in the quarter, beating analyst expectations. About 7% of this growth came from AI (up from 6% last quarter), and Microsoft is happy with customer adoption so far, CFO Amy Hood said in an interview. mentioned in.
“Across Azure, we're seeing healthy growth in non-AI and AI services, which is important,” Hood said. “Of course, the long-term AI monetization opportunity is still in its infancy, but we are happy with where we are now.”
Microsoft's GitHub coding platform is also gaining momentum, with 1.8 million customers in the period, up from 1.3 million in the previous quarter. The AI coding assistant leverages OpenAI's large-scale language models and streamlines developers' work by predicting lines of code, answering questions, and translating code from one programming language to another. Masu. Corporate subscribers range from small start-ups to large corporations such as Goldman Sachs Group, Ford Motor Co., and Ernst & Young.
The company also sees early adoption of AI assistants that work with Office software. To take advantage of the new tools, businesses will have to pay an additional $30 per month on top of their existing subscription. Nadella told analysts that nearly 60% of Fortune 500 customers use CoPilot.
Not everyone reporting earnings Thursday had good news to share. Intel gave a lackluster outlook for sales and profits this quarter, sending its stock plummeting in after-hours trading. The chipmaker said it expects business to pick up again in the second half of this year.
Microsoft and Alphabet needed strong results to avoid surprising investors, after Facebook's parent company announced on Wednesday's earnings call that it would invest billions more than expected in AI. Investors' stock prices fell on Thursday. Alphabet spent $12 billion on capital expenditures in the quarter, about double the total for the same period last year, and Porat told investors it expects similar spending for the rest of the year. After investing $14 billion in capital expenditures during the quarter, Microsoft said spending will continue to rise.
“As the demand for AI continues to grow, we will continue to match that demand,” Hood said.
—With assistance from Dina Bass and Davey Alba.
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