Microsoft MSFT-Q is outstripping Alphabet Inc. GOOGL-Q in the race to make money from generative artificial intelligence through early bets on OpenAI and focus on big clients, raising worries the Google Inc. 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 the shares of the Windows maker up nearly 4 per cent on Wednesday.
But in a sharp contrast, growth at Alphabet’s cloud unit hit a near three-year low as its big exposure to smaller clients dampened growth, sending the company’s shares tumbling more than 9 per cent.
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 Inc. has turned to startups.
“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 startup clients, which have been more aggressive with cost-control efforts,” Morningstar analyst Ali Mogharabi said.
If share losses hold, Alphabet Inc. was set to erase more than US$150-billion from its market value, underscoring fears that its focus on startups and slower rollout of AI services was delaying the boost from the technology.
Gains in the shares of Microsoft were set to add about US$100-billion to its market capitalization.
“Microsoft is using its incumbent software relationships, whereas Google Inc. is coming in as a little bit of a challenger here,” said Krishna Chintalapalli, portfolio manager at Parnassus Investments, an investor in Alphabet Inc. 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 Microsoft’s cloud business in the September quarter.
CEO Satya Nadella said about 40 per cent 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 US$30-a-month offering next month for its 365 service that can summarize a day’s worth of e-mails into a quick update.
Analysts said that will further drive up adoption of its AI services. Alphabet Inc. has also deployed AI in products such as its flagship Pixel phones and had 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 D.A. Davidson said.
At least 22 brokerages raised their price targets on the software giant, pushing their median view to US$400. That was 17 per cent higher than the company’s last traded share price of US$342.78.
Many analysts were 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 Inc. Cloud optimization 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 Inc. after the expected rollout of Gemini, which is 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 Inc. parent’s 24.93.