Microsoft (MSFT 0.15%) and Alphabet (GOOG 0.80%) (GOOGL 0.83%) moved in opposite directions as investors digested earnings reports from the two big tech companies.
Microsoft moved higher Wednesday after it beat estimates on the top and bottom lines, and offered solid guidancefor the fiscal second quarter. Alphabet, on the other hand, also beat estimates, but the company posted weaker-than-expected growth in Google Cloud, leading to a sharp sell-off on Wednesday. The performance was particularly disappointing compared to the results from Microsoft's Azure cloud-infrastructure service.
Let's take a look at the numbers and examine how Microsoft came out on top in the latest round.
Image source: Getty Images.
Google Cloud vs. Azure
Google Cloud has long trailed Microsoft's Azure and Amazon Web Services (AWS) in the massive cloud-infrastructure market. As the smallest of the three major cloud infrastructures, it only recently turned profitable, while Azure and AWS generated billions in profits each quarter.
Q2 results showed Google Cloud losing market share to Azure and its revenue growth decelerating from 28% in Q2 to just 22% in Q3 to $8.4 billion, representing growth of less than 5% on a sequential basis. Operating profit at Google Cloud also fell from $395 million in Q2 to $266 million in Q3.
Microsoft, on the other hand, reported 29% revenue growth in Azure and other cloud services, up from 26% growth in the prior quarter, and revenue from its intelligent-cloud segment rose 19% to $24.3 billion with operating income up 31% to $11.8 billion, translating into an operating margin of 48.6%.
That's an astounding profit margin and shows that Microsoft's cloud business is executing much more effectively than Alphabet's.
How Azure is winning
On Microsoft's earnings call, CEO Satya Nadella said Azure took market share in the quarter, helped by having the most widespread cloud footprint with 60 data-center regions and the "best AI infrastructure for training and inference."
Azure OpenAI now has more than 18,000 customers, and the AI features have attracted brand new customers to Azure as well.
CFO Amy Hood also added, "Higher-than-expected AI consumption contributed to revenue growth in Azure," and the company expects growth in Azure to be mostly steady over the rest of the year, targeting 26% growth.
Nadella explained another advantage that Microsoft has. All of its AI products from ChatGPT and Bing Chat to Copilot use the same model: "So, in some sense, one of the things that we do have is very, very high leverage of the one model that we used, which we trained, and then the one model that we are doing inferencing at scale."
Alphabet doesn't have the range of product diversification that Microsoft does as most of the Google parent's revenue comes from advertising, which doesn't seem to have benefited significantly from AI so far.
Alphabet also talked up its AI-based cloud features, including Duet AI, which helps users be more productive on Google with features like giving retailers new insights into their data. However, Google Cloud's improvements don't seem to be resonating as strongly with customers as the shift in revenue growth at the two cloud platforms is noticeable. Alphabet's management also noted some headwinds from cost-optimization efforts by its customers as well.
What it means for investors
The latest update from Microsoft and Google gives the early lead in the AI race to Microsoft, though it's not what CEO Satya Nadella seemed to expect. Early in the year, when Microsoft launched its new version of Bing, powered by ChatGPT, Nadella predicted a "new race" in AI, but Bing has not made much of a dent in Google's dominance of search. Microsoft reported 10% revenue growth in search and news advertising, similar to the growth Google's ad business experienced.
However, Microsoft is leveraging AI in Azure and beyond, including with Github and its office suite, and it plans to make its Microsoft 365 AI copilot generally available on Nov. 1, which could be a significant growth driver for its office-productivity software.
Alphabet, on the other hand, doesn't necessarily need Google Cloud to be successful as most of its business comes from advertising, and it's applying generative AI to its core search business, where it could have a greater impact for that company.
For investors wondering which AI stock to choose, they're both worth owning, especially as they both remain leaders in AI. After the recent updates, however, it's clear that Microsoft is executing on its AI initiatives better than Alphabet right now.
