Microsoft solidifies cloud dominance over Alphabet by prioritizing OpenAI and attracting major clients.
By Aditya Soni
October 25, 2023 – 1:59 PM UTC
(Reuters) – Microsoft is leading the way in profiting from generative artificial intelligence, thanks to its early investments in OpenAI and focus on major clients. This has raised concerns that Google’s parent company, Alphabet, could lose market share in the cloud-computing industry.
Cloud spending by businesses looking to implement AI features has driven growth for Microsoft’s Azure platform in the first quarter, resulting in a nearly 4% increase in the company’s shares on Wednesday.
On the other hand, Alphabet’s cloud unit experienced its slowest growth in nearly three years, as its reliance on smaller clients hindered its progress. This caused the company’s shares to plummet more than 9%.
In the battle to tap into the next growth driver for the cloud business, Microsoft has focused on its existing core business clients who already use its software services, while Google has targeted startups.
According to Morningstar analyst Ali Mogharabi, “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.”
If Alphabet continues to lose market share, it could potentially wipe out over $150 billion from its market value, highlighting concerns that its emphasis on startups and slower rollout of AI services is delaying the benefits of this technology.
Meanwhile, Microsoft’s shares are expected to gain around $100 billion in market capitalization.
“Microsoft is leveraging its existing software relationships, while Google is entering as a challenger,” said Krishna Chintalapalli, portfolio manager at Parnassus Investments, an investor in Alphabet and Microsoft.
The results indicate that cloud spending is primarily coming from enterprise clients, while smaller businesses are reducing their expenditure, according to Chintalapalli.
The strong use of AI contributed to a 3 percentage point boost in Microsoft’s cloud business in the September quarter.
CEO Satya Nadella revealed that about 40% of Fortune 500 companies were using the test version of its “Copilot” AI service, which is powered by OpenAI’s technology.
The company plans to launch a $30-a-month offering next month for its 365 service, which can summarize a day’s worth of emails into a quick update.
Analysts believe this will further drive the adoption of Microsoft’s AI services. Alphabet has also incorporated AI into products such as its flagship Pixel phones and recently tested adding generative AI to its search engine.
“Unlike many others who are promoting their AI capabilities, Microsoft is actually delivering meaningful AI products to their customers,” stated brokerage D.A. Davidson.
At least 22 brokerages have raised their price targets for the software giant, with a median view of $400, which is 17% higher than the company’s last traded share price of $342.78.
While many analysts are optimistic about Alphabet’s core search business, they warn that the weakness in its cloud business will persist.
“It’s unclear how widespread Google 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,” cautioned Bernstein analysts.
AI is expected to become a major growth driver for Alphabet in 2023, especially with the anticipated launch of Gemini, a collection of large-language models.
“Early results for Gemini are very promising,” said CEO Sundar Pichai.
Microsoft currently trades at 28.5 times its 12-month forward earnings estimates, compared to Alphabet’s parent company, which trades at 24.93 times.
Reporting by Aditya Soni in Bengaluru; additional reporting by Akash Sriram; Editing by Arun Koyyur
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Why has Alphabet’s cloud unit experienced slow growth, and what impact has this had on the company’s market value?
Nerative AI and AI services indicate strong potential for both Microsoft and Alphabet. However, recent data suggests that Microsoft has taken the lead in profiting from generative artificial intelligence, causing concerns for Alphabet’s future in the cloud-computing industry.
Microsoft’s early investments in OpenAI and its focus on major clients have allowed the company to secure a strong position in the cloud industry. This strategy has resulted in significant growth for Microsoft’s Azure platform, with a nearly 4% increase in the company’s shares. On the other hand, Alphabet’s cloud unit experienced its slowest growth in nearly three years, primarily due to its reliance on smaller clients. As a result, Alphabet’s shares plummeted by more than 9%.
In the battle to tap into the next growth driver for the cloud business, Microsoft has focused on its existing core business clients who are already using its software services. In contrast, Google has targeted startups. While demand for artificial intelligence drove growth for both companies, Google’s larger clients have been more aggressive with cost-control efforts, hindering its progress.
If Alphabet continues to lose market share, it could potentially lose over $150 billion from its market value, highlighting the risk of its emphasis on startups and slower rollout of AI services. In contrast, Microsoft’s shares are expected to gain around $100 billion in market capitalization.
The results indicate that cloud spending is primarily coming from enterprise clients, while smaller businesses are reducing their expenditure. Cloud spending by businesses looking to implement AI features has contributed significantly to Microsoft’s growth. CEO Satya Nadella revealed that about 40% of Fortune 500 companies were using the test version of its “Copilot” AI service, powered by OpenAI’s technology. The company plans to launch a $30-a-month offering next month for its 365 service, further driving the adoption of its AI services.
Analysts believe that Microsoft is delivering meaningful AI products to its customers, which sets it apart from others who are merely promoting their AI capabilities. At least 22 brokerages have raised their price targets for Microsoft, with a median view of $400, 17% higher than the company’s last traded share price.
While analysts are optimistic about Alphabet’s core search business, they caution that the weakness in its cloud business is likely to persist. It remains unclear how widespread Google Cloud optimization efforts are and how far along customers are in the journey. However, AI is expected to become a major growth driver for Alphabet in 2023, especially with the anticipated launch of Gemini, a collection of large-language models.
In conclusion, Microsoft’s early investments in AI and its focus on major clients have given the company a leading edge in profiting from generative artificial intelligence. This has caused concerns for Alphabet, whose reliance on smaller clients has hindered its progress in the cloud industry. The results highlight the importance of targeting enterprise clients and delivering meaningful AI products to drive growth in the cloud-computing industry.
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