Microsoft, Alphabet profit from AI-integrated cloud “fever”

Alphabet, Google's parent company, and computing giant Microsoft on October 24 reported strong third-quarter 2023 profits thanks to demand for cloud computing services integrated with artificial intelligence (AI) technology.

Alphabet reported third-quarter profit of $19.7 billion, driven largely by advertising, YouTube and cloud services.

Alphabet's revenue reached $76.7 billion, up significantly from $69 billion in the same period last year.

However, Google Cloud's third-quarter revenue increased only 22.5% to $8.41 billion, the slowest increase since the first quarter of 2021. The figure was also lower than the market forecast of $8.62 billion.

Google Cloud reported operating profit of $266 million, a reversal from an operating loss of $440 million in the same period a year ago.

Google Cloud's revenue miss was largely due to slowing growth momentum, Baird Equity Research analyst Colin Sebastian said in a note to investors.

He agrees that the new business of generative AI will take time to really gain traction and accelerate.

Similar to Google, technology giant Microsoft said profits increased in the third quarter thanks to strong growth in its Azure cloud services segment.

The company also reported better-than-expected results, posting net income of $22.3 billion in the third quarter, up 27% from the same period a year ago. Overall, the company reported revenue of $56.5 billion in the quarter, also higher than expected.

All eyes are on Microsoft's AI and cloud computing businesses, with a focus on its Azure cloud service, a competitor to Google Cloud and Amazon's AWS.

Revenue growth for Azure and other Microsoft cloud services was 29% year over year in the last quarter, slightly faster than the previous quarter.

Consumers and investors are closely watching how companies apply AI, a technology in which Google, Microsoft and OpenAI are seen as leaders.

But Alphabet is largely seen as trying to catch up with Microsoft, with questions about whether Google's mighty search engine can withstand the rise of AI.

Microsoft has been rapidly upgrading its Bing search engine through AI integration.

But Google's search engine has yet to see any real threat to its dominance and continues to hold around 90% of the worldwide online search engine market.

Cloud computing is a much more complex business than advertising, and it is an area where Google faces fierce competition, said Max Willens, an analyst at market research firm Insider Intelligence.

While Google could profit from AI in the long run, its cloud computing business is not attractive enough to satisfy investors right now, Willens added.