Microsoft Gets Another Leg Up on Google in AI Race | Mint

Microsoft Gets Another Leg Up on Google in AI Race

Microsoft Gets Another Leg Up on Google in AI Race
Microsoft Gets Another Leg Up on Google in AI Race

Summary

Google’s cloud business is slowing and weighing on earnings, while Microsoft’s Azure is shaking off a slump.

Big tech’s two early movers on artificial intelligence both still have a way to go before the much-hyped technology starts generating significant business. But if their latest quarterly results are any indication, it may be Microsoft’s game to lose.

Microsoft and Google-parent Alphabet both saw improvements to their core businesses during the September quarter according to results posted by both companies late Tuesday. Google’s advertising revenue grew 9% year-over-year to $59.6 billion during the quarter, beating Wall Street’s expectations and up notably from the 3% growth reported for the June period. That was helped by a notable pickup in YouTube’s advertising revenue, which jumped 12% for its quickest pace in nearly two years. It probably isn’t a coincidence that this was during a period in which Hollywood’s crippling labor strikes resulted in fewer new TV shows and movies being released.

But it was a different story for Google’s cloud business, where revenue grew 22% year-over-year to $8.4 billion. That was 3% below Wall Street’s forecasts and contrasted sharply with the trend for Microsoft’s much larger cloud business, where the company’s Azure public cloud service saw revenue jump 29% to an estimated $16.7 billion during the same quarter. Azure’s growth was up 3 percentage points from the June quarter, while Google Cloud lost six points of growth in the same period.

Microsoft’s results also showed strength in other areas. The sharp drop in PC sales seen earlier this year has moderated, giving a strong boost to the operating earnings for Microsoft’s segment that includes its Windows operating system. The segment, which contains the company’s broad suite of business software, delivered its highest operating margin in at least a decade. Microsoft also projected better-than-expected revenue and operating income for the December quarter, boosted by its recently completed acquisition of Activision Blizzard. Google, per its longstanding practice, refrained from giving any financial forecast.

The differing results caused a sharp reversal for both stocks. Microsoft’s share price rose nearly 4% in after-hours trading after having lost 6% since the company’s last report. The stock of Google’s parent company slid more than 6% after having jumped 14% since its last report. The results will likely reignite the debate from earlier this year about which company is in a better position to capitalize on the growing interest around generative AI. Microsoft’s aggressive adoption of ChatGPT’s technology since the launch of the chatbot late last year drove its stock to outperform Alphabet’s for the first half of this year. But Google has long been using AI to power its internet search business and has been moving quickly to catch up.

Microsoft has an advantage given that the majority of its existing business comes from selling software and cloud services to businesses that are more inclined to pay early on for technology that can help automate everything from coding to spreadsheet analysis to PowerPoint creations. The company said Tuesday that more than one million users are already paying to use its AI-enabled CoPilot feature. That may jump significantly as the tool becomes generally available to users of its Microsoft 365 suite of software next month.

By contrast, Google’s own Bard chatbot was described by Chief Executive Sundar Pichai on Tuesday as “an early experiment and complementary experience" to the search engine that is still the company’s dominant business.

Still, a long race awaits both, and an expensive one at that. Microsoft had a record $9.9 billion in capital expenditures during the quarter, while Google’s own capex bill topped $8 billion, which the company noted was “somewhat muted" due to the timing of supplier payments. Both are expecting to see those bills rise in the months ahead. Both also name-checked Nvidia’s H100 chips—the expensive and much-in-demand processors powering GenAI capabilities in data centers. Wall Street sees capital expenditures for the tech duo topping $30 billion during this calendar year, more than four times the average of the 100 largest spenders on the S&P 500.

In the AI world, you have to spend an awful lot of money to make money.

Write to Dan Gallagher at dan.gallagher@wsj.com

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