Alphabet and Microsoft send clear message to investors: Our AI spending is paying off

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Microsoft Corp. and Google owner Alphabet Inc. sent a clear message to investors on Thursday: Our spending on artificial intelligence and cloud computing is paying off. 

The companies trounced Wall Street estimates with their latest quarterly results, lifted by a surge in cloud revenue — fueled in part by booming use of AI services. That sent shares of the companies up in late trading, with Alphabet soaring as much as 17% and Microsoft gaining 6.3%. 

The tech titans have been locked in a fierce battle for dominance in the field of artificial intelligence, with Microsoft joining forces with startup OpenAI to challenge Google’s two-decade stranglehold on internet search. But Thursday’s results showed there’s ample room for both companies to grow. 

Silicon Valley has hailed 2024 as the year that companies will begin to deploy generative AI — technology that can create text, images and videos from simple prompts. In back-to-back earnings calls, Alphabet and Microsoft executives said the programs are driving more business for their cloud computing units.

Corporate customers are more open to making long-term investments in their cloud infrastructure, said Tejas Dessai, research analyst at Global X ETFs. That’s helped make the sometimes-volatile industry more reliable.

“It’s quite clear from these earnings from Microsoft and Google that cloud infrastructure demand is starting to normalize,” Dessai said. “Foundational cloud infrastructure is showing healthy growth.”

Rising cloud computing demand comes as a welcome turn for Google, which has long trailed Inc. and Microsoft in the market. After breaking even for the first time last year, Google’s cloud operation posted first-quarter profit of $900 million — well ahead of analysts’ projections of $672.4 million. The unit is viewed as one of Google’s best bets for growth as its core search advertising business matures.

“For years, Google Cloud was usually a weak spot during Alphabet’s earnings calls,” said Lee Sustar, a principal analyst with Forrester Research Inc. “These latest results show that Google Cloud’s AI offerings not only got enterprise customers to take another look, but spend some serious money.” 

Google’s success with corporate clients follows some embarrassing setbacks in the consumer market. In February, its flagship AI model Gemini was roundly criticized after it spit out historically inaccurate images, prompting the company to stop generating depictions of people.Play Video

The enterprise side of the market has been a very different story, according to Google Cloud Chief Executive Officer Thomas Kurian. The professional version of Gemini comes with various controls to help marketers ensure that the content is staying consistent with their brands. The service can be used to produce ads, ward off cyber threats, and even create videos and podcasts.

“We are really excited about the benefit from AI for our cloud customers,” Chief Financial Officer Ruth Porat said on Thursday. “We saw an increasing contribution from our AI solutions.”

For Microsoft, generative AI is letting the company wring more spending from its core enterprise clients. Chief Executive Officer Satya Nadella has been infusing Microsoft’s entire product line with AI technology from partner OpenAI. The bet is starting to pay off, with some customers adding AI tools that summarize documents and generate content. They’re also signing up for Azure cloud subscriptions featuring OpenAI products.

Microsoft said sales of its Azure cloud computing platform climbed 31% in the quarter, beating analysts’ expectations. About 7% of that increase was attributable to AI, compared with 6% in the previous quarter, and Microsoft is pleased with customer adoption so far, Chief Financial Officer Amy Hood said in an interview.

“You’re seeing healthy growth really across Azure, in the non-AI and AI services, which is important,” Hood said. “While of course it’s still early in the long-term AI monetization opportunity, we feel good about where we are.” 

Microsoft’s GitHub coding platform is also gaining traction, recording 1.8 million customers during the period, up from 1.3 million last quarter. The AI-coding assistant is powered by OpenAI’s large 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 like Goldman Sachs Group Inc., Ford Motor Co. and Ernst & Young. 

The company is also seeing promising initial uptake for an AI assistant meant to work with its Office software. The new tools cost companies an extra $30 a month on top of existing subscriptions. Nadella told analysts almost 60% of Fortune 500 customers are using the Copilot.

Not everyone reporting earnings on Thursday had good news to share. Intel Corp. gave a lackluster forecast for sales and profit 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.Play Video

Microsoft and Alphabet needed to deliver a strong performance to avoid spooking investors, who sent shares of Meta Platforms Inc. down Thursday after the Facebook parent said during its Wednesday’s earnings that it would invest billions of dollars more than expected on AI. Alphabet spent $12 billion on capital expenditures in the quarter, roughly twice its total from the year-ago quarter, and Porat told investors to expect similar spending for the rest of the year. After investing $14 billion in capital expenditures during the quarter, Microsoft said its spending will continue to rise.

“We’re seeing the AI demand continue to grow, and so we’ll continue to work to match that,” Hood said.

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