In the last quarter, in an intensifying cloud rivalry, Microsoft has emerged as the new giant and its investments in artificial intelligence (AI) are starting to pay rich dividends. The tech leader's continued focus on AI, backed by significant investment in OpenAI, is helping Azure, Microsoft's cloud arm, steadily gain an edge over its competitors, particularly Google Cloud.
Market reaction to the quarter's results
The September quarter witnessed this drama as Alphabet, Google's parent company, saw a decline in its cloud business compared to Microsoft's upward trajectory. Despite beating Wall Street's expectations for overall earnings and revenue, Alphabet's stock plunged 7%[1] during after-hours trading, reflecting investor concerns about its ability to match Microsoft's in artificial intelligence and the cloud. Microsoft, on the other hand, saw its shares rise 5%[2], underlining the market's growing confidence in its AI strategy. *
Azure shines
Microsoft's Azure cloud platform dazzled with a 29% increase in revenue, beating analysts' predictions. Revenue from the Intelligent Cloud unit climbed to $24.3 billion, primarily attributed to the company's heavy investment in AI. Microsoft CFO Amy Hood admitted that the higher-than-expected AI adoption rate was indeed the catalyst that added 3 percentage points to the cloud business. The robust integration of OpenAI technology into Microsoft's extensive catalogue of products, including Bing, Microsoft 365, and GitHub, appears to be a masterstroke that is attracting more businesses to its cloud and AI offerings.
Google Cloud slowdown
Google's cloud business, on the other hand, slumped 22.5% to $8.41 billion, its slowest growth in at least 11 quarters. The market expected more, as the figure fell short of Wall Street's average estimate of $8.62 billion. Although Google is incorporating artificial intelligence into many products such as its flagship Pixel phones, and recently launched its chatbot with generative artificial intelligence, Bard, to compete with Microsoft's ChatGPT, it appears to be lagging in capturing the cloud services market.
Different strategies
The two tech giants' cloud business strategy also reflects a contrasting approach. While Google is trying to woo AI start-ups for its cloud division, Microsoft is leveraging its existing relationships to secure larger customers, a strategy that has responded better to market dynamics this quarter.
Outlook
With Amazon's AWS cloud division's business results due later this week, the cloud battle is intensifying. However, as of now, Microsoft’s aggressive spending on artificial intelligence to meet growing demand gives it an advantage and casts a lingering shadow over Google's cloud ambitions.
As competition in the cloud heats up, developments suggest a broader shift in the industry, driven by AI capabilities as a new differentiator. The road ahead appears to be paved with aggressive investment in AI and robust cloud strategies as tech giants vie for market dominance.
* Past performance is no guarantee of future results
[1] Alphabet's stock performance over the past five years: https://tradingeconomics.com/goog:us
[2] Microsoft's stock performance over the past five years: https://tradingeconomics.com/msft:us
