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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 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 percent 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 percent drop in Alphabet’s shares.
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 adopting 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 hinders technological advancement.
With the rise in shares, Microsoft stands to gain around $90 billion in market capitalization.
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 drive cloud spending while smaller businesses reduce expenditures.
Substantial 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 percent 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. On the other hand, Alphabet 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 percent 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 auspicious (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.
