(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, lifted by an increase in cloud revenue — driven in part by increased use of AI services. Shares of companies continued to rise. Alphabet rose 12 percent and Microsoft rose 4 percent in premarket trading on Friday in New York.
As the tech titans are locked in a fierce battle for dominance in the field of artificial intelligence, Microsoft has joined forces with startup OpenAI to challenge Google's two-decade dominance of Internet search. . But Thursday's results showed that both companies have plenty of room to grow.
Silicon Valley has hailed 2024 as the year companies will begin deploying generative AI — technology that can generate text, images and videos with simple gestures. In back-to-back earnings calls, Alphabet and Microsoft executives said the programs are driving more business for their cloud computing units.
Tejas Desai, research analyst at Global X ETFs, said corporate customers are more open to making long-term investments in their cloud infrastructure. It has helped make a sometimes volatile industry more reliable.
“With these earnings from Microsoft and Google, it's very clear that demand for cloud infrastructure is starting to normalize,” Desai said. “Core Cloud Infrastructure Showing Healthy Growth.”
The growing demand for cloud computing comes as a welcome turn for Google, which has overtaken Amazon.com Inc. in the market. And has long outpaced Microsoft. After breaking even for the first time last year, Google's cloud operation posted a profit of $900 million in the first quarter — well ahead of analysts' estimates 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 has typically been a weak point during Alphabet's earnings calls,” said Lee Sister, principal analyst at Forrester Research Inc. These latest results show that Google Cloud's AI offerings not only gave enterprise customers another look, but also some serious cash to spend.”
Google's success with corporate clients follows some embarrassing failures in the consumer market. In February, its flagship AI model Gemini came under fire after spitting out historically inaccurate images, prompting the company to stop photographing people.
The enterprise side of the market has been a very different story, according to Thomas Koren, chief executive officer of Google Cloud. The professional version of Gemini comes with various controls to help marketers ensure that content is consistent with their brands. The service can be used to create ads, avoid cyber threats, and even create videos and podcasts.
“We're really excited about the benefits AI can bring to our cloud customers,” Chief Financial Officer Ruth Porat said Thursday. “We've seen increased support from our AI solutions.”
For Microsoft, generative AI is allowing the company to outspend its core enterprise clients. Chief Executive Officer Satya Nadella is infusing Microsoft's entire product line with AI technology from partner OpenAI. The bet is starting to pay off, with some users adding AI tools that summarize documents and generate content. They are also signing up for Azure cloud subscriptions that include OpenAI products.
Microsoft said sales of its Azure cloud computing platform rose 31 percent in the quarter, beating analysts' expectations. Chief Financial Officer Amy Hood said in an interview that about 7% of the increase was attributable to AI, compared with 6% in the previous quarter, and that Microsoft has been pleased with consumer adoption so far.
“You're seeing really healthy growth in non-AI and AI services, in Azure, which is important,” Hood said. “While it's certainly still a long-term AI monetization opportunity, we feel good about where we are.”
Microsoft's GitHub coding platform is also gaining, recording 1.8 million users during the period, up from 1.3 million in the previous quarter. The AI-coding assistant is powered by OpenAI's massive language model and helps streamline 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 businesses such as Goldman Sachs Group Inc., Ford Motor Company and Ernst & Young.
The company is also seeing early uptake for an AI assistant that works with its Office software. The new tools cost companies an additional $30 per month on top of existing subscriptions. About 60 percent of Fortune 500 customers are using Copilot, Nadella told analysts.
Not everyone reporting earnings on Thursday had good news to share. Intel Corp. gave a poor forecast for sales and profits in the current quarter, sending its shares tumbling in extended trading. The chipmaker said it expects business to pick up again in the second half of the year.
Microsoft and Alphabet need to deliver a strong performance to fend off spooked investors, who sent shares of MetaPlatforms Inc. on Thursday after the Facebook parent said during Wednesday's earnings that it made more than expected on AI. will invest billions of dollars. Alphabet spent $12 billion on capital expenditures in the quarter, nearly double its total from the year-ago quarter, and Porat told investors to expect similar spending for the rest of the year. Expect expenses. After investing $14 billion in capital expenditures during the quarter, Microsoft said its spending will continue to rise.
“We're seeing the demand for AI continue to grow, and so we'll continue to work to meet that,” Hood said.
– With help from Dina Bass and Davy Alba.
(Updates shares with premarket trading.)
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