Microsoft and Google gain after AI fuels demand for cloud computing

(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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The companies beat Wall Street estimates with their latest quarterly results, driven by a surge in cloud revenues – fueled in part by growing use of AI services. Company shares rose. Alphabet rose 12% and Microsoft gained 4% in Friday premarket trading in New York.

Tech titans have waged a fierce battle for dominance in the field of artificial intelligence, with Microsoft joining forces with startup OpenAI to challenge Google’s two-decade dominance in internet search. But Thursday’s results showed there is ample room for both companies to grow.

Silicon Valley has hailed 2024 as the year companies will begin deploying generative AI — technology that can create text, images and videos from simple instructions. In back-to-back earnings calls, executives at Alphabet and Microsoft said the programs are generating more business for their cloud computing units.

Enterprise customers are more open to making long-term investments in their cloud infrastructure, said Tejas Dessai, research analyst at Global X ETFs. This has helped make the sometimes volatile industry more trustworthy.

“From these gains from Microsoft and Google, it is quite clear that demand for cloud infrastructure is starting to normalize,” Dessai said. “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. and Microsoft in the market. After breaking even for the first time last year, Google’s cloud operation posted a first-quarter profit of $900 million — well above analyst projections of $672.4 million. The unit is seen as one of Google’s best bets for growth as its core search advertising business matures.

“For years, Google Cloud was generally a weak point during Alphabet’s earnings calls,” said Lee Sustar, principal analyst at Forrester Research Inc. “These latest results show that Google Cloud’s AI offerings have not only made for corporate customers to take a fresh look, but spend a lot of money.

Google’s success with corporate customers follows some embarrassing setbacks in the consumer market. In February, its flagship AI model, Gemini, was heavily criticized after spitting out historically inaccurate images, which led the company to stop generating representations of people.

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The enterprise side of the market has been a very different story, according to Google Cloud CEO Thomas Kurian. 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, ward off cyber threats and even create videos and podcasts.

“We are really excited about the benefits of AI for our cloud customers,” said Chief Financial Officer Ruth Porat on Thursday. “We have seen a growing contribution from our AI solutions.”

For Microsoft, generative AI is enabling the company to capture more spend from its top enterprise customers. CEO Satya Nadella has been infusing Microsoft’s entire product line with AI technology from partner OpenAI. The bet is starting to pay off, with some customers adding AI tools that summarize documents and generate content. They are also signing up for Azure cloud subscriptions with OpenAI products.

Microsoft said sales of its Azure cloud computing platform rose 31% in the quarter, exceeding analysts’ expectations. About 7% of that increase was attributed to AI, compared with 6% in the previous quarter, and Microsoft is pleased with customer adoption so far, Chief Financial Officer Amy Hood said in an interview.

“We’re seeing really healthy growth across Azure, in both non-AI and AI services, which is important,” Hood said. “While it’s still early days for the long-term AI monetization opportunity, we feel good where we are.”

Microsoft’s GitHub coding platform is also gaining traction, signing up 1.8 million customers during the period, up from 1.3 million last quarter. The AI ​​coding assistant is powered by OpenAI’s great language model and helps speed up 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 is also seeing promising early uptake of an AI assistant intended to work with its Office software. The new tools cost companies an extra $30 per month on top of existing subscriptions. Nadella told analysts that nearly 60% of Fortune 500 customers are using Copilot.

Not everyone reporting earnings on Thursday had good news to share. Intel Corp. released a lackluster forecast for sales and profits in the current quarter, sending its shares tumbling in prolonged trading. The chipmaker said it expects business to recover again in the second half of the year.

Microsoft and Alphabet needed to deliver a strong performance to avoid spooking investors, who sent shares of Meta Platforms Inc. falling on Thursday after Facebook’s parent company said during Wednesday’s earnings that it would invest billions of dollars more than expected in AI. Alphabet spent $12 billion on capital expenditures in the quarter, roughly double the total for the same quarter a year ago, 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 its spending will continue to increase.

“We are seeing the demand for AI continue to grow and we will continue to work to meet that,” Hood said.

–With assistance from Dina Bass and Davey Alba.

(Updates shares with pre-market trading.)

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