Microsoft pulls ahead of Alphabet in race for the cloud
Software giant has focused on core business clients already using many of its services, while Google’s parent has turned to start-ups
Microsoft is outstripping Alphabet in the race to make money from generative artificial intelligence through early bets on OpenAI and a focus on big clients, raising concerns that the Google parent could lose share in the cloud-computing market.
Cloud spending by businesses preparing to roll out AI features powered a rebound in growth for Microsoft’s Azure platform in its first quarter, lifting its shares 3.6% on Wednesday.
In sharp contrast, growth at Alphabet’s cloud unit hit a near three-year low as its higher exposure to smaller clients dampened growth, sending the company’s shares tumbling 6%.
In the battle to tap the next growth driver for the cloud business, Microsoft has focused on its core business clients that already use many of its software services, while Google has turned to start-ups.
“Demand for artificial intelligence drove Microsoft’s growth. Demand among Google’s larger clients was similar, but the firm is more exposed to high-growth and start-up clients, which have been more aggressive with cost-control efforts,” Morningstar analyst Ali Mogharabi said.
If the share losses persist, Alphabet is set to erase more than $100bn from its market value, underscoring fears that its focus on start-ups and slower roll out of AI services was delaying the boost from the technology.
Gains in the shares of Microsoft were set to add about $90bn to its market capitalisation.
“Microsoft is using its incumbent software relationships, whereas Google is coming in as a little bit of a challenger here,” said Krishna Chintalapalli, portfolio manager at Parnassus Investments, an investor in Alphabet and Microsoft.
The results show cloud spending is coming from enterprise clients, whereas smaller businesses are reducing their expenditure, he said.
Strong AI use was responsible for a 3 percentage point boost to the Microsoft’s cloud business in the September quarter.
CEO Satya Nadella said about 40% of the Fortune 500 companies were using the test version of its Copilot AI service, which is powered by OpenAI’s technology.
The company will launch the $30/month offering next month for its 365 service that can summarise a day’s worth of emails into a quick update.
Analysts said that will further drive adoption of its AI services. Alphabet has also deployed AI in products such as its flagship Pixel phones and more recently tested adding generative AI to its search engine.
“Unlike many others who are touting their AI story, Microsoft is capable of delivering meaningful AI products to their customers,” brokerage DA Davidson said.
At least 19 brokerages raised their price targets on the software giant, pushing their median view to $400. That was 16% higher than the company’s premarket share price of $342.78.
Many analysts are also optimistic about strength in Alphabet’s core search business, but they warned the weakness in the cloud business would continue.
“It’s unclear just how widespread Google Cloud optimisation efforts are and how far along customers are in the journey, but expect these headwinds to persist for at least a few more quarters,” Bernstein analysts said.
AI is expected to become more of a growth driver in 2023 for Alphabet after the expected roll out of Gemini, a collection of large-language models.
“Early results are very promising [for Gemini],” CEO Sundar Pichai said.
Microsoft trades at 28.5 times its 12-month forward earnings estimates, compared with the Google parent’s 24.93.
Reuters