AI Investments Set to Soar, Microsoft and Alphabet Reveal

[Edited] In the September quarter, Microsoft's cloud business soared, leaving Alphabet, the parent company of Google, trailing behind.

Credits : REUTERS

This development indicates that Microsoft's investment in artificial intelligence (AI) is paying off. While Alphabet's overall profit and sales exceeded Wall Street estimates, its cloud business suffered, causing a 7% drop in the company's shares. In contrast, Microsoft's shares rose by 5%.

Investors were particularly keen to see Alphabet demonstrate its competitiveness against Microsoft's Azure and Amazon.com's AWS cloud businesses, as well as deliver gains in the field of AI. Bob O'Donnell, chief analyst at TECHnalysis Research, noted that this quarter's cloud results suggest that Azure is gaining market share against its competitors. He also suggested that Microsoft's strong messaging on their Copilots and GenAI technology is making companies consider them more seriously.

Microsoft has emerged as a frontrunner in the AI space, largely due to its significant investment in startup OpenAI. OpenAI is the creator of the popular generative AI chatbot ChatGPT. Microsoft has been integrating OpenAI's technology across its product catalog, from its search engine Bing to its workplace productivity software suite Microsoft 365 and software coding platform Github.

Alphabet has also incorporated AI into many of its products, such as its flagship Pixel phones, and has recently experimented with adding generative AI to its search engine. Earlier this year, the company launched its own generative AI chatbot called Bard, which competes directly with ChatGPT.

Microsoft's chief financial officer, Amy Hood, attributed a 3 percentage point boost to the company's cloud business to higher-than-expected AI consumption. On the other hand, Alphabet has focused on attracting AI startups as customers for its cloud division, while Microsoft has relied on its existing relationships to secure larger customers. This strategy is reflected in the recent results.

Microsoft's Intelligent Cloud unit, which includes the Azure cloud-computing platform, generated $24.3 billion in revenue, surpassing analysts' estimates of $23.49 billion. Azure revenue experienced a 29% growth, exceeding the 26.2% growth estimate from market research firm Visible Alpha. RBC Capital Markets has projected that Microsoft will generate over $3 billion in revenue from generative AI offerings this fiscal year.

In contrast, Google's cloud business revenue rose by 22.5% to $8.41 billion in the quarter ending on September 30. Although this represents growth, it is the slowest in at least 11 quarters and fell short of the average Wall Street estimate of $8.62 billion.

Microsoft has committed to aggressive spending on AI to meet the growing demand. The company reported that its fiscal first-quarter capital expenditures reached $11.2 billion, up from $10.7 billion in the previous quarter, marking the highest spending since at least fiscal 2016. Microsoft executives anticipate that this figure will continue to grow each quarter, putting the company on track to spend more than $44 billion.

Google's capital expenditures grew by 10.7% to $8.06 billion in the July-September period compared to the previous year.

Tejas Dessai, an analyst at Global X, expressed surprise at Microsoft's strong growth in the Azure Cloud segment, driven by AI-as-a-service-related demand. He described the numbers as "absolutely phenomenal," considering the cautious macroeconomic outlook and the uncertain IT spending environment.

Amazon is scheduled to report its quarterly results on Thursday, and analysts expect Amazon Web Services (AWS) to post a 12.4% increase in sales. Following the news, Amazon's shares fell by 1.4% in after-hours trading on Tuesday.

Microsoft's investment in AI has propelled its cloud business, Azure, to new heights.
Alphabet, on the other hand, has struggled to keep pace with Microsoft's AI advancements.
Microsoft's integration of OpenAI's technology across its product catalog has contributed to its success.

Source : REUTERS

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