Microsoft (MSFT) and Google parent Alphabet (GOOG, GOOGL) reported their earnings after the bell Tuesday for what investors hoped would be an explosion of artificial intelligence power from both tech giants.
And while the two beat Wall Street’s expectations on both their top and bottom lines, Microsoft came away the winner after reporting better-than-expected growth in its Azure business thanks to the strength of its AI offerings. Google, on the flip side, reported slower-than-anticipated growth in its cloud business, despite pumping cash into its AI efforts.
It was a tale of two clouds for the rivals. While Microsoft outpaced analysts’ predictions, Google fell short, and investors reacted in turn, driving shares of Microsoft higher some 4% in early trading Wednesday, while Google shares sank more than 8%.
“I think what this is telling us is, Microsoft is absolutely in a league of its own when it comes to enterprise software, when it comes to tech,” RBC Capital Markets equity analyst Rishi Jaluria told Yahoo Finance Live on Wednesday.
“It’s an unparalleled year for Microsoft. Who would have thought if we were … having this conversation a year ago and I were to tell you, ‘Hey Microsoft is the leader in Big Tech AI, not Google,’ you probably would have laughed at me and told me to get off of your show,” Jaluria added.
Microsoft reported Azure growth of 29% in its first quarter, a marked reacceleration for the segment, which saw sequential growth fall in prior quarters, and above Wall Street’s estimates of 27%.
During Microsoft’s earnings call, CEO Satya Nadella rattled off a litany of ways the company’s customers are using its AI capabilities, including its AI copilot platforms, across its various offerings. That includes 18,000 organizations that use the company’s Azure OpenAI Service, 37,000 organizations that now subscribe to Copilot for Business, and 126,000 organizations that have used the company’s Copilot in Power Platform to date.
“Despite a difficult environment, we remain confident [Microsoft's] growth opportunities over the medium term and beyond are greater than many realize, and this includes significant generative AI monetization,” Mizuho analyst Gregg Moskowitz wrote in an investor note after the call.
Microsoft has been pouring money into its AI efforts, including a multibillion-dollar investment in ChatGPT developer OpenAI. And with AI permeating seemingly every aspect of Microsoft’s enterprise and, increasingly, consumer offerings, those investments are beginning to bear fruit.
While Microsoft was taking a victory lap, shares of Alphabet were taking a beating. Despite its all-important ad business beating expectations, taking in $59.7 billion versus an anticipated $58.9 billion, its Google Cloud business fell short of Wall Street’s expectations. The segment brought in $8.41 billion in the quarter, while analysts were looking for $8.6 billion.
The company’s stock fell off more than 8.5% in early trading Wednesday.
CEO Sundar Pichai talked up a slew of AI efforts underway at the company, but didn’t provide nearly as many concrete numbers as Nadella. Google’s cloud business sits in third place behind market leaders Amazon and Microsoft, and AI is seen as a means of helping the segment grow at a faster clip. But, at least this quarter, that wasn’t enough to keep Wall Street happy.
Despite the dichotomy in cloud performance, Google isn’t exactly hurting. And some analysts were quick to point out that Google’s cloud revenue is something of an afterthought compared to its ad business.
“Owning Alphabet for its Cloud business is like rooting for Michael Jordan to play baseball,” Wedbush analyst Scott Devitt wrote in an investor note following the earnings announcement. “We think the reaction in shares after-market is overdone and believe investors are placing too much relative value on the company's Cloud segment which accounts for just ~11%.”
Google is also, importantly, working on building out its Search Generative Experience (SGE), which is a form of Google Search that uses generative AI capabilities to provide answers to users’ queries. More specifically, Pichai explained, Google is ensuring it has the right ad experience for the product.
“[Ads] will continue to play an important role in this new Search experience. People are finding ads helpful here as they provide useful options to take action and connect with businesses,” he said during the earnings call.
“We'll experiment with new formats native to SGE that use generative AI to create relevant, high-quality ads customized to every step of the Search journey.”
So while Google’s AI cloud efforts might not be paying off as well as Microsoft’s, it’s still making strong moves in its most important business segment: advertising.
Of course, the current AI boom is still young — it hasn’t even been a year since ChatGPT was released to the public — and anything can still change for both Microsoft and Google. But for now, it looks as though, at least as far as the cloud goes, Microsoft is dominating.
Daniel Howley is the tech editor at Yahoo Finance. He's been covering the tech industry since 2011. You can follow him on Twitter @DanielHowley.
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