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The two biggest players in Big Tech’s AI arms race failed to impress Wall Street when they reported what seemed like good news in quarterly earnings calls this week.
Microsoft and Google parent Alphabet both delivered earnings and revenue that beat analyst expectations, but Microsoft’s share price dipped slightly, while Google’s dropped 7% as of Wednesday afternoon.
There were several potential culprits for the lukewarm reception: Growth in Google’s core ad business didn’t quite match analyst hopes, according to CNBC. Investors may have been put off by bigger price tags on the horizon for both companies’ AI ambitions. Microsoft has also set a high bar with previous AI-centric earnings that drove the company’s value near the $3 trillion mark.
The companies’ dueling earnings reports come as Wall Street has begun to scrutinize whether huge investments in the infrastructure needed to power AI projects will ultimately pay off.
Copiloting takeoff: One of Microsoft’s big answers to that question has been the rollout of its Copilot 365 product, which weaves large language models (LLMs) through its productivity suite. Microsoft made that tool available to consumers and businesses with under 300 employees for the first time in January.
Microsoft CEO Satya Nadella said users have adopted the Copilot much faster than they did with previous software suite launches, and he expects it to become “standard issue” for companies.
“You’ll see work and workflow change as people summarize faster, draft regulatory submissions faster, chat to get knowledge from your business,” Nadella said in the call. “Those are the things that we are seeing as overall patterns.”
Meanwhile, Google’s AI ambitions have entered what CEO Sundar Pichai calls the “Gemini era,” referring to the debut of Google’s long-awaited multimodal foundation model that slightly edges out OpenAI’s GPT-4 by some measures. While the reception to that model was a bit underwhelming, Pichai said the maximized version, called Ultra, is coming soon. He also emphasized how Gemini would transform the company’s core search business.
“We’re already experimenting with Gemini in Search, where it’s making our Search Generative Experience, or SGE, faster for users,” Pichai said in the call.
Google’s focus on AI drove Cloud revenue to $9.2 billion, a 26% YoY jump. Microsoft said its Azure cloud services revenue grew 30% YoY, while its Intelligent Cloud business as a whole accounted for $25.9 billion in revenue.
Lee Sustar, a principal analyst with Forrester, said in a note that the growth in the cloud was proof that AI investments were starting to pay off for each company.
“The notable gain in Microsoft Cloud revenues…show that the AI boom is giving a significant boost to cloud providers’ bottom line,” Sustar wrote. “Google Cloud has left behind years of quarterly losses and now accounts for 10% of Alphabet revenue as it uses the AI moment to reintroduce itself to enterprise IT leaders as a partner. All eyes will be on Amazon’s upcoming earnings call…to see whether AWS has seen similar gains from AI.”