Microsoft Wins another Round in the AI Face-off with Alphabet after their Q3 Results

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Artificial Intelligence Progress

Open AI took the tech world by storm nearly a year ago, with the launch of ChatGPT, a generative Artificial Intelligence (AI) chatbot, able to generate responses to user questions. Generative AI emerged as the main battlefield in Silicon Valley, as tech giants race to offer similar products.

Microsoft has the first mover advantage, since it was able to quickly leverage the billions of dollars it has invested in OpenAI to launch an AI-powered version of its Bing search engine, which could undermine Alphabet's dominance. Alphabet (GOOG.us) appeared to have been taken off guard, but has picked up speed after the slow start.

The two companies have emerged as key AI contenders, weaving the technology into a series of products and services, from cloud and search engines, to email, advertising and other areas. Making the next step in its AI strategy, Microsoft will be charging corporations $30/month for the use of AI-powered versions of its office suite like Word, Excel and Teams, starting November 1. Its rival is doing the same thing, with its Workspace family of products that includes Gmail, Calendar and Drive Docs and more.

Microsoft AI Monetization

Despite expanding their Artificial Intelligence (AI) capabilities, up until now the two tech giants had not seem able to make AI a revenue and profit driver the way Nvidia has done, which has seen a surge in its top and bottom lines. Tuesday's quarterly results however, showed that this is beginning to change in the case of Microsoft, manifesting in the firm's cloud business performance.

Microsoft's Intelligent Cloud segment, which includes the Azure cloud computing platform, is the firm's main revenue generator. It brought in $24.259 billion in Q1 FY24 (quarter ended September 30), beating the firm's own projections and marking a 19% y/y growth, the fastest in a year. [1]

During the earnings call, CFO Amy Hood attributed the increased Azure revenues to "higher than expected AI consumption" and expects Artificial Intelligence to have increasing contribution to revenue growth. CEO Satya Nadella noted that "more than 18,000 organizations" now use the Azure OpenAI Service, which is used for creation of chatbots, text generation, language translations and more. [2]

Alphabet's Google Cloud Revenues increased roughly 22.5% to $8.411 billion in Q3, but that constituted another slowdown, in pointed divergence from its competitor. [3]

Microsoft Wins Another Round

Microsoft reported an increase in both top and bottom lines, but most importantly, the results showed that artificial intelligence has started to have an impact, contributing to its revenue growth. It seems to have a more unified approach and clearer communication around the integration of AI across its portfolio. CEO Satya Nadella hammered the message home, noting that Microsoft is "rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers". [2]

Rival Alphabet is making AI headway after the timid start and delivered strong results overall, with record revenues and increased profits. However, it was not able to tie these results to its Artificial Intelligence advances and seems to be behind Microsoft.

Microsoft wins another round in this AI face-off, since its early lead has started to bear fruit. Investors reacted positively to the results and its stock was up in Wednesday's pre-market. In stark contrast, Alphabet's stock was down, as markets were disappointed by the cloud segment deceleration and underwhelmed by its AI messaging.

On the other hand, it is still early in the AI race and despite Microsoft head start, Google's search engine dominance does not appear under immediate threat, as the business' revenues soared in Q3.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 25 Oct 2023 https://www.microsoft.com/en-us/investor/earnings/FY-2024-Q1/press-release-webcast

2

Retrieved 25 Oct 2023 https://view.officeapps.live.com/op/view.aspx

3

Retrieved 16 Jul 2024 https://abc.xyz/assets/4a/3e/3e08902c4a45b5cf530e267cf818/2023q3-alphabet-earnings-release.pdf

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