Alphabet and Microsoft earnings send a clear message to investors: Our AI spending is paying off

The companies beat Wall Street estimates with their latest quarterly results, boosted by a surge in cloud revenue — fueled in part by a boom in the use of artificial intelligence services. That sent the companies' shares soaring in late trading, with Alphabet stock rising as much as 17% and Microsoft gaining 6.3%.

Tech giants are locked in a fierce battle for dominance in the field of artificial intelligence, with Microsoft and startup OpenAI joining forces to challenge Google's two-decade stranglehold on internet search. But Thursday's results showed there is plenty of room for both companies to grow.

Silicon Valley has hailed 2024 as the year companies will begin deploying generative AI, technology that can generate text, images and videos with simple prompts. In successive earnings calls, executives at Alphabet and Microsoft said software was driving more business for their cloud computing units.

Corporate clients are more open to making long-term investments in their cloud infrastructure, said Tejas Desai, research analyst at Global X ETFs. This has helped make a sometimes volatile industry more reliable.

“It's pretty clear from these earnings from Microsoft and Google that demand for cloud infrastructure is starting to return to normal,” Desai said. “Core cloud infrastructure is showing healthy growth.”

The rise in demand for cloud computing comes as a welcome shift for Google, which has long lagged behind Amazon.com and Microsoft in the market. After breaking even for the first time last year, Google's cloud operations posted first-quarter earnings of $900 million — exceeding analysts' expectations of $672.4 million. The unit is seen as one of Google's best bets for growth as its core search advertising business matures.

“For many years, Google Cloud has typically been a weak point during Alphabet's earnings calls,” said Lee Sostar, principal analyst at Forrester Research Inc. “These latest results show that Google Cloud's AI offerings have not only prompted enterprise customers to take another look, but Also spend some serious money.

Google's success with business customers comes on the heels of some embarrassing setbacks in the consumer market. In February, its flagship AI model, Gemini, came under fire after it posted historically inaccurate photos, prompting the company to stop producing photos of people.

It was the institutional side of the market Very different storyAccording to Google Cloud CEO Thomas Kurian. The professional version of Gemini comes with various controls to help marketers ensure content remains consistent with their brand. The service can be used to produce ads, ward off cyber threats, and even create videos and podcasts.

“We are really excited about the benefits of AI for our cloud customers,” Ruth Porat, chief financial officer, said Thursday. “We have seen an increasing contribution from our AI solutions.”

For Microsoft, generative AI allows the company to extract more spending from its core enterprise customers. CEO Satya Nadella has integrated Microsoft's entire product line with AI technology from partner OpenAI. The bet is starting to pay off, as some customers have added AI tools that summarize documents and generate content. They're also signing up for Azure cloud subscriptions that feature OpenAI products.

Microsoft said sales of its Azure cloud computing platform rose 31% in the quarter, beating analysts' expectations. About 7% of that increase was attributable to artificial intelligence, compared to 6% in the previous quarter, and Microsoft is pleased with customers' adoption so far, Chief Financial Officer Amy Hood said in an interview.

“You're seeing really healthy growth across Azure, in non-AI and AI services, which is important,” Hood said. “Although we are still early in the long-term AI monetization opportunity, we feel good about where we are now.”

Microsoft's GitHub programming platform is also gaining traction, recording 1.8 million customers during the period, up from 1.3 million last quarter. The AI ​​Coding Assistant is powered by OpenAI's large language model and helps simplify developers' work by predicting lines of code, answering questions, and converting code from one programming language to another. Corporate subscribers range from small startups to large corporations like Goldman Sachs Group Inc. and Ford Motor Co. and Ernst & Young.

The company is also seeing a promising initial uptake of an AI assistant dedicated to working with its Office programs. The new tools cost businesses an additional $30 per month on top of existing subscriptions. Nearly 60% of Fortune 500 customers use Copilot, Nadella told analysts.

Not everyone who reported earnings on Thursday had good news to share. Intel gave a Faint expectations to sales and profits in the current quarter, causing its shares to decline in extended trading. The chipmaker said it expects business to pick up again in the second half of the year

Microsoft and Alphabet needed to deliver strong performances to avoid spooking investors, who had pushed shares of Meta Platforms Inc. fell on Thursday after Facebook's parent company said during earnings on Wednesday that it would invest billions of dollars More than expected On artificial intelligence. Alphabet spent $12 billion on capital expenditures this quarter, nearly double total expenses compared to the same quarter last year, and Porat told investors to expect similar spending for the rest of the year. After investing $14 billion in capital expenditures during the quarter, Microsoft said its spending will continue to rise.

“We are seeing demand for AI continue to grow, so we will continue to work to match that,” Hood said.