Microsoft’s edge in AI pays off while Google tries to catch up in the cloud

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Microsoft received an unexpected financial boost from generative AI while Google struggled with sagging growth in a core part of its business as it ploughs money into the tech industry’s hottest new technology, according to quarterly results released on Tuesday.

The contrasting performance of two of the tech industry’s biggest arch-rivals underlined the early lead Microsoft has taken in the AI race that broke out after the launch of ChatGPT late last year.

Its shares rose 4 per cent on the earnings news, adding about $100bn to its stock market value, while Alphabet, Google’s parent, lost about $100bn in market capitalisation as its shares slid more than 6 per cent in after-hours trading.

“Microsoft was certainly in front of AI faster and they’re monetising it well,” said Brent Thill, an analyst at Jefferies. “Google struggled.”

The companies’ divergent fortunes came in the cloud computing market, which involves delivering IT services to customers over the internet. Microsoft reported an unexpected rebound in growth in its cloud computing platform, Azure, after a year in which many customers have been squeezing their cloud spending.

The software company said it was still under pressure as users try to “optimise” their cloud work, but that new AI projects had more than outweighed this and brought a return to growth.

Wall Street had been expecting a slowdown in Azure following the 27 per cent constant-currency growth of the preceding quarter. But growth instead rebounded to 29 per cent, or 28 per cent excluding the effects of currency movements, helping to lift Microsoft’s overall revenue and earnings well ahead of forecasts.

Meanwhile, growth in Google’s cloud computing division sagged to 22 per cent, below the 26 per cent investors had expected. Although accounting for only 11 per cent of Alphabet’s revenues, and despite better than expected results from in the company’s advertising business, the cloud results were enough to dent Alphabet’s stock after a 33 per cent run-up this year.

Thill said that Google’s big investments in AI meant that it would “get back in” and help it to become a force in the cloud computing market, but that for now, Microsoft was growing much faster, despite starting with a far bigger cloud business than Google.

In a call with analysts, Microsoft chief executive Satya Nadella said his company was benefiting from its decision to build a single, unitary technology platform to support its AI services. It first invested $1bn in start-up OpenAI more than three years ago and has since put OpenAI’s models at the core of its AI infrastructure, supporting a range of its own software applications as well as AI services for other companies.

Amy Hood, chief financial officer, said that new business coming to Microsoft’s cloud platform in the latest quarter was “primarily AI” and that as a result the company was “taking share” in the cloud business.

Meanwhile, Alphabet chief executive Sundar Pichai called AI “a foundational platform shift” that would have benefits across the company’s business. He said Google was “working through” getting ready for the launch of Gemini, its next big AI model, which could help it leapfrog OpenAI in the race to power the next generation of AI services.

Despite the pick-up from AI, Microsoft said growth in its cloud platform was likely to slip back slightly from its current level, though remain stable for the rest of its fiscal year, which ends next June.

Overall, the software company reported revenue of $56.5bn, an increase of 13 per cent from a year ago, while earnings per share rose 27 per cent to $2.99. Wall Street had been expecting earnings of $2.65 a share on revenue of $54.5bn.