I want to dig into the earnings reports from last week – while Apple comes out this week, we have information from many others.
Microsoft reported better-than-expected results for Q1 2024, with a 13% revenue growth attributed to investments in AI and its generative AI product range. Revenue for Azure and cloud services rose 29% year-on-year, and Microsoft’s overall revenue for the period was $56.5 billion. The company expects continued revenue growth in Intelligent Cloud and Azure for Q2, driven by AI workloads.
Microsoft’s CEO, Satya Nadella, announced that the number of paying customers for GitHub Copilot software increased by 40% in the September quarter compared to the previous quarter, reaching over 1 million users in more than 37,000 organizations. The company is also seeing growth in its generative AI business, with Copilot Chat being used by digital natives like Shopify and leading enterprises like Maersk and PWC. Microsoft’s partnership with OpenAI and the integration of AI in various products, including the Bing search engine and Microsoft Edge browser, contribute to the company’s revenue growth in Azure.
Alphabet shares fell as Microsoft’s cloud unit outperformed in the race to monetize generative artificial intelligence. While Microsoft’s Azure platform experienced growth fueled by cloud spending from business clients, Alphabet’s cloud unit faced challenges due to its focus on smaller clients. Concerns were raised about Alphabet’s slower rollout of AI services and its ability to compete with Microsoft’s core business clients. The results indicate that enterprise clients are driving cloud spending while smaller businesses are reducing their expenditures.
Alphabet’s cloud computing unit reported lower-than-expected profits, causing concerns about its position in the market. Google Cloud’s operating income of $266 million fell short of estimates of $434 million. Despite attracting business from AI startups, Google Cloud’s momentum in the most recent quarter was disappointing, widening the gap between Google and its competitors. Alphabet’s shares fell 6.5% in premarket trading as a result.
Google CEO Sundar Pichai suggested that the company may consider subscription business models for its new AI products, including Search Generative Experience and Google Bard. Pichai mentioned that subscription models have been successful for YouTube and could be a path for AI offerings. This potential shift is significant for Google, which primarily relies on advertising revenue. The company is cautious about disrupting its lucrative Search ads but sees an opportunity to evolve Search and the Google Assistant service with AI over the next decade.
Amazon reported better-than-expected third-quarter earnings and revenue, with earnings per share of 94 cents and revenue of $143.1 billion. The company’s core e-commerce business saw a 7% growth, while Amazon Web Services and advertising revenues were slightly below expectations. Amazon’s fourth-quarter sales guidance is between $160 billion and $167 billion. The company’s cost-cutting efforts have resulted in a significant increase in operating income and free cash flow. Despite the positive results, Amazon’s shares fell over the past two trading days, following the trend of other tech companies.
Despite Microsoft making headlines for its AI implementation and Alphabet experiencing a slight cloud miss, Amazon remains the dominant player in the cloud infrastructure market. With steady growth and a significant market share, Amazon’s lead is evident. The cloud infrastructure market continues to grow, reaching over $68 billion worldwide, and Amazon holds around 33% of the market share. While Microsoft and Google are also increasing, Amazon’s position remains strong.
Why do we care?
Microsoft is killing it due to AI, and it’s exposed a sense of weakness around Google. It certainly appears they missed the mark on AI. Does Google have the classic innovator’s dilemma? It sure seems so – forced to consider damaging their core ad business in order to protect search in a world of AI. The cloud businesses for all three of the big players grew, and let’s not that while Amazon’s numbers may not meet the market’s expectations on ads, they have a sizeable both search and ad business. Google is feeling some pressure. This is a cautionary tale about the risk of over-relying on a single revenue stream, especially when disruptive technologies like AI are transforming the industry.
But hidden in those earnings calls was that indication of cloud spending being driven by enterprise with small customers cutting back. That’s your key detail here – all performance is not the same despite size. Cost management is still a key trend for smaller organizations, and I predict the AI runways will relate closely to size of company.