Microsoft Corporation and Google owner Alphabet Inc. sent a clear message to investors Thursday: Our spending on artificial intelligence and cloud computing is paying off.
The companies beat Wall Street estimates with their latest quarterly results, boosted by rising cloud revenue driven in part by explosive growth in the use of artificial intelligence services. That sent the companies’ shares higher in late trading, with Alphabet shares soaring as much as 17% and Microsoft shares up 6.3%.
Tech giants are locked in a bitter 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 both companies have plenty of room to grow.
Silicon Valley has heralded 2024 as the year companies will begin adopting generative artificial intelligence, a technology that can generate text, images and videos using simple prompts. In back-to-back earnings calls, executives from Alphabet and Microsoft said the programs were driving business growth for their cloud computing units.
Enterprise clients are more open to long-term investments in their cloud infrastructure, says Tejas Dessai, analyst at Global X ETF. This has helped make a volatile industry more secure.
“It’s very clear from these earnings from Microsoft and Google that demand for cloud infrastructure is starting to normalize,” Dessai said. “The core cloud infrastructure is showing healthy growth.”
The growing demand for cloud computing is a welcome turnaround for Google, which has long lagged Amazon.com Inc. in the market. and Microsoft. After breaking even for the first time last year, Google’s cloud division posted first-quarter profit of $900 million, well ahead of analysts’ estimates of $672.4 million. The division is seen as one of Google’s best options for growth as its core search advertising business evolves.
“For years, Google Cloud has typically been a weak spot during Alphabet’s earnings calls,” said Lee Sastar, principal analyst at Forrester Research Inc. “These latest results show that Google Cloud’s artificial intelligence offerings have not only got enterprise customers to take a second look, but also to spend some serious money.”
Google’s success with enterprise clients follows some disappointing failures in the consumer market. In February, its flagship artificial intelligence model Gemini came under fire after it published historically inaccurate images, prompting the company to stop creating images of people. Play video
Enterprises on the market were a completely different storyAccording to Google Cloud CEO Thomas Kurian. The professional version of Gemini comes with a variety of controls to help marketers ensure content is relevant to their brands. The service can be used to create advertising, protect against cyber threats, and even create videos and podcasts.
“We are very excited about the benefits of artificial intelligence for our cloud customers,” Chief Financial Officer Ruth Porat said Thursday. “We have seen the growing impact of our artificial intelligence solutions.”
For Microsoft, generative AI allows the company to capture more spend from its core enterprise customers. CEO Satya Nadella is introducing artificial intelligence technology from partner OpenAI across Microsoft’s entire product line. The bet is starting to pay off: Some clients are adding artificial intelligence tools that summarize documents and generate content. They also subscribe to Azure cloud subscriptions with OpenAI products.
Microsoft said sales of its Azure cloud computing platform rose 31% in the quarter, beating analysts’ expectations. About 7% of that growth came from artificial intelligence, up from 6% in the previous quarter, and Microsoft is still pleased with how customers have embraced it, Chief Financial Officer Amy Hood said in an interview.
“You’re really seeing healthy growth in Azure, both in non-AI services and in AI, which is important,” Hood said. “While it is certainly too early to talk about the long-term monetization of AI, we are pleased with where we are.”
Microsoft’s coding platform GitHub is also gaining traction, with 1.8 million customers in the period, up from 1.3 million last quarter. The AI Coding Assistant is based on OpenAI’s large language model and helps optimize developers’ work by predicting lines of code, answering questions, and converting code from one programming language to another. Corporate subscribers range from small startups to large companies such as Goldman Sachs Group Inc., Ford Motor Co. and Ernst & Young.
The company also sees promise in its initial offering of an AI assistant designed to work with its Office software. The new tools cost companies an additional $30 per month on top of their existing subscriptions. Nadella told analysts that nearly 60% of Fortune 500 customers use Copilot.
Not everyone who reported earnings on Thursday had good news to share. Intel Corporation gave disappointing forecast for sales and earnings in the current quarter, sending its shares lower in extended trading. The chipmaker said it expects business to pick up in the second half of the year. Play video
Microsoft and Alphabet needed to deliver strong results to avoid spooking investors, who sent shares of Meta Platforms Inc. crashing Thursday. after Facebook’s parent company said during earnings Wednesday that it would invest billions of dollars. more than expected on AI. Alphabet spent $12 billion on capital expenditures in the quarter, about double the year-ago quarter, and Porat told investors they expect similar spending through the end of the year. After investing $14 billion in capital expenditures during the quarter, Microsoft said its costs will continue to rise.
“We see the demand for AI continuing to grow, and so we will continue to work to meet that,” Hood said.