Alphabet CEO Sundar Pichai speaks at the Munich Security Conference at the Bayerischer Hof Hotel in Munich, Germany, on February 16, 2024.
Tobias Haase | Image Alliance | Getty Images
With Wall Street's laser focus on cloud computing this week, Google The internet company has outpaced its competitors in growth, a key sign for investors that the internet company is gaining momentum in the artificial intelligence space.
Google The cloud business, which includes infrastructure as well as software subscriptions, grew 35% year over year in the third quarter to reach $11.35 billion, accelerating from 29% in the prior period.
Amazon Web Services, still the market leader, grew 19% to $27.45 billion, meaning it's more than twice the size of Google Cloud but expanding at about half the speed. Microsoft, which ranked second, said its revenues from Azure and other cloud services increased by 33% from the previous year.
Five of the six trillion-dollar tech companies reported results this week, with one artificial intelligence chip maker among them Nvidia As an outsider. Amazon, Alphabet and Microsoft always report at around the same time, giving investors a snapshot of how the cloud wars are going.
“While Alphabet has often been criticized as a mere footnote for its reliance on digital advertising, Google Cloud's rapid growth is beginning to diversify the company's revenue,” analysts at Argus Research, who recommended buying the stock, wrote in an article. Report on October 31.
For a long time, the cloud was Google's money maker, but that's no longer the case.
Google reported a 17% cloud operating margin in the third quarter, after turning a profit for the first time last year. That was a “real beat of expectations out there,” Melissa Otto, head of technology, media and telecommunications sector research at Visible Alpha, said on CNBC this week. She said she is not sure whether the company can maintain this level of profitability.
The opposite story was true at Amazon, which has long relied on AWS for the bulk of overall profits.
AWS's operating margin for the third quarter was 38%, which analysts at Bernstein described as a “huge” number. Executives were eager to hire and discontinued less popular AWS services. Also at the beginning of 2024, Amazon extended the useful life of its servers from five years to six, a change that boosted operating margin by 200 basis points, or two percentage points.
Microsoft This week, it began giving investors a more accurate read on the Azure public cloud. When the company has reported Azure revenue growth in the past, the number will include sales of mobility services, security and Power BI data analytics software. Microsoft, which is the lead investor in ChatGPT creator OpenAI, is getting a big boost from AI services.
“Demand continues to be higher than our available capacity,” Amy Hood, Microsoft's chief financial officer, said on the company's earnings call.
While Azure growth in the current quarter will moderate slightly, Hood said it should rebound in the first half of 2025 “as our capital investments create an increase in AI capacity available to serve more growing demand.”
Amazon is seeing a similar dynamic.
“I think pretty much everyone today has less capacity than demand, and chips primarily are an area where companies could use more supply,” Amazon CEO Andy Jassy said on his company's earnings call.
To help ease the burden, Amazon relies to some extent on its own processors, as well as graphics processing units (GPUs) from Nvidia. Customers have shown interest in Trainium 2, the company's second-generation chip for training models, Jassy said.
“We went back to our manufacturing partners several times to produce much more than we originally planned,” he said.
Google is now working on the sixth generation of tensor processing units for AI. CEO Sundar Pichai told analysts that he was spending some time with the TPU team.
“I couldn't be more excited about this forward-looking roadmap, but it all allows us to plan for the future and lead with an improved architecture for it,” he said.
Microsoft introduced its own AI chip in the cloud, Maia, a year ago. The company has begun using Maia chips to power its own services, but has not yet made them available for customers to rent, a company spokesperson said.
Analysts at DA Davidson said in a note this week that they don't view this as a fight that Microsoft can win against Amazon and Google. They have a Neutral rating on Microsoft.
oraclewhich ranks fourth overall among U.S. cloud infrastructure companies, is expected to report quarterly results in December. In its latest report, oracle Cloud infrastructure revenue jumped 45% to $2.2 billion, compared with growth of 42% in the previous quarter, it said.
Oracle recently partnered with its three largest cloud competitors to make its databases available on their services, a move that Chairman Larry Ellison said in a recent earnings call, “will fuel the growth of our database business for years to come.”
Watch: Otto: The scale of Alphabet's cloud business and spending on AI infrastructure will be critical
