Alphabet, Microsoft Earnings: AI Success Linked to Cloud

Cloud services and generative artificial intelligence (AI) were prominent in earnings reports from Alphabet (Nasdaq: GOOGL) and Microsoft (Nasdaq: MSFT) last night, as both companies predicted revenue and increased capital expenditure (capex) for both areas. The two companies also indicated that cloud and AI success are interdependent.

Alphabet’s Google Cloud revenue grew 28% year-over-year (y/y) to $8 billion in the quarter and accounted for $395 million in operating profit. The segment comprised 11% of Alphabet’s revenue, which came in at $75 billion, up 7% y/y. Alphabet’s quarterly diluted earnings per share (EPS) was $1.44, up 19% y/y on net income of $18 billion, which was up 15%.

AI was the focal point of comments from Alphabet CEO Sundar Pichai, who stressed the company’s use of the technology in its products on the earnings call last night:

“This is our seventh year as an AI-first company, and we intuitively know how to incorporate AI into our products. Large language models make them even more helpful -- models like PaLM 2, and soon, Gemini, which we’re building to be multimodal. These advances provide an opportunity to reimagine many of our products, including our most important product, Search.”

Pichai also noted how the Google Cloud platform is boosting generative AI:

“Our AI-optimized infrastructure is a leading platform for training and serving generative AI models. More than 70% of Gen AI unicorns are Google Cloud customers, including Cohere, Jasper, Typeface, and many more.”

Alphabet also see the focus on generative AI raising the need to invest in components that address the high levels of compute power required to run large language models (LLMs) on the Google Cloud Platform. Ruth Porat, Alphabet CFO, said on the earnings call:

“We expect elevated levels of investment in our technical infrastructure, increasing through the back half of 2023 and continuing to grow in 2024. The primary driver is to support the opportunities we see in AI across Alphabet, including investments in GPUs [graphics processing units] and proprietary TPUs [tensor processing unit], as well as data center capacity.”

In midmorning trading today, Alphabet shares were priced at $129.70, up 6.91 (+5.63%).

Microsoft Boasts Cloud, Warns AI Growth Will Be “Gradual”

Microsoft’s Intelligent Cloud segment, which includes Azure, grew 15% y/y to $24 billion in the latest quarter (Microsoft’s Q4). The segment comprised 43% of overall revenue, which came in at $56 billion, an increase of 8% from last year’s quarter. Quarterly diluted EPS for Microsoft this quarter was $2.69, up 21%, on net income of $20.1 billion, which was up 20% y/y.

Microsoft expects that for next quarter, Intelligent Cloud revenue will increase 15% to 16%, driven by Azure, which is expected to grow 25% to 26% in constant currency. And capex will grow too, according to CFO Amy Hood, who said on the conference all last night:

“To support our Microsoft Cloud growth and demand for our AI platform, we will accelerate investment in our cloud infrastructure. We expect capital expenditures to increase sequentially each quarter through the year as we scale to meet demand signals.”

When it comes to AI, Microsoft boasted that Azure OpenAI Service has signed over 11,000 customers, hundreds of which were added during the quarter. CEO Satya Nadella also touted the reach of the company’s related generative AI solution, GitHub Copilot, which helps developers quickly generate code. Separately, Microsoft has added OpenAI tools to its Bing search engines and Office 365, both of which operate mainly in Azure.

All this aside, CFO Hood said during the call that AI-based revenue wouldn’t grow dramatically, despite heightened investment in cloud and AI:

“Even with strong demand and a leadership position, growth from our AI services will be gradual as Azure AI scales and our Copilots reach general availability dates.”

That comment may have helped push Microsoft’s stock down following the call. In midmorning trading today, Microsoft shares were trading at $335.66, down 15.32 (-4.36%).

Futuriom Take: The latest financial reports from Alphabet and Microsoft reveal the ongoing popularity of cloud services and the growth of interest in generative AI. Both areas are inextricably bound; one depends on the other.