Microsoft races ahead of Google in profiting from Generative AI as Alphabet struggles with cloud

Microsoft has surged ahead of Alphabet, raising concerns about Google’s stake in the cloud-computing market. Microsoft’s strategic early investments in OpenAI and a focus on large corporate clients have driven its success, while Alphabet is struggling

In the fierce competition to capitalize on generative AI, Microsoft has surged ahead of Alphabet, raising concerns about Google’s stake in the cloud-computing market. Microsoft’s strategic early investments in OpenAI and a focus on large corporate clients have driven its success, while Alphabet faces the risk of losing market share.

Businesses’ increased cloud spending to implement AI features ignited a remarkable rebound in growth for Microsoft’s Azure platform during the first quarter. This surge propelled Microsoft’s stock up by 3.6 per cent on Wednesday.

In stark contrast, Alphabet’s cloud unit reported a nearly three-year low in growth due to its heavier reliance on smaller clients, causing a 6 per cent drop in Alphabet’s shares.

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Microsoft’s strategy for the cloud business has concentrated on its existing corporate clientele that extensively utilizes its software services. In contrast, Google has predominantly targeted startups.

Morningstar analyst Ali Mogharabi observed, “Demand for artificial intelligence fueled Microsoft’s growth. Google’s larger clients showed similar demand, but the company is more exposed to high-growth startups that have adopted stringent cost-control measures.”

If Alphabet continues to lose market share, it could potentially wipe out over $100 billion from its market value, underscoring concerns that its focus on startups and the slower rollout of AI services is hindering technological advancement.

Microsoft stands to gain around $90 billion in market capitalization with the rise in its shares.

Krishna Chintalapalli, portfolio manager at Parnassus Investments, an investor in both Alphabet and Microsoft, stated, “Microsoft leverages its existing software relationships, while Google enters the field as a challenger.”

The results highlight that enterprise clients are driving cloud spending, while smaller businesses are cutting back on expenditures.

Strong utilization of AI contributed to a 3-percentage point boost to Microsoft’s cloud business in the September quarter. CEO Satya Nadella disclosed that approximately 40 per cent of Fortune 500 companies were using the trial version of their “Copilot” AI service, powered by OpenAI technology.

Next month, Microsoft will launch a $30-per-month offering for its 365 service that can summarize a day’s worth of emails into a quick update. Analysts predict this will further enhance the adoption of Microsoft’s AI services. Alphabet, on the other hand, has incorporated AI into products like its flagship Pixel phones and recently experimented with integrating generative AI into its search engine.

“D.A. Davidson,” a brokerage firm, pointed out, “Unlike many others who are touting their AI story, Microsoft is capable of delivering meaningful AI products to their customers.”

At least 19 brokerages have increased their price targets for the software giant, pushing the median outlook to $400, a 16 per cent increase over the premarket share price of $342.78.

Many analysts are optimistic about the strength of Alphabet’s core search business but have expressed concerns about the cloud business’s continued weakness.

Bernstein analysts noted, “It’s unclear just 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.”

AI is anticipated to become a more substantial growth driver for Alphabet in 2023 following the expected launch of “Gemini,” a collection of large-language models.

CEO Sundar Pichai commented, “Early results are very promising (for Gemini).”

In terms of valuation, Microsoft trades at 28.5 times its 12-month forward earnings estimates, compared to the Google parent company’s 24.93.

(With input from agencies)