Cost Worries Cast a Shadow Over AI Plans at Microsoft and Google

By Roze 6 Min Read

Investor excitement about Big Tech’s potential financial rewards from generative AI was muted when Google and Microsoft issued warnings this year about additional significant expenses associated with the arms race to create cutting-edge AI products.

Strong quarterly results from the competing tech titans on Tuesday did not convince investors that their plans to invest heavily in servers and data centers this year in order to offer generative AI will not be matched by growth.

Microsoft’s shares increased by roughly 0.7% just after Wall Street opened on Wednesday, following the company’s announcement of robust cloud computing sales from clients keen to utilize its suite of software services that incorporate technology from ChatGPT creator OpenAI.

Even as it seeks to incorporate its Gemini generative AI into its advertising, search, and cloud businesses, Alphabet shares fell more than 5% in early Wednesday trade as its advertising sales came in just short of estimates. Both sides issued warnings, estimating that in 2024, capital expenditures would increase as they spend more heavily in the generative AI technology infrastructure.

Microsoft’s partnership with OpenAI, a start-up to which it has contributed up to $13 billion, propelled the company into the forefront of the generative AI race last year. nearly the last 12 months, investor excitement has driven up the price of its shares by nearly 60%, increasing its market worth to $3 trillion. This month, it surpassed Apple to become the biggest company in the world.

Cost Worries Cast a Shadow Over AI Plans at Microsoft and Google

Investors have been keeping a careful eye on its cloud sector, which is the main source of revenues and includes its Azure platform, for any signs that its financial rewards from its OpenAI wager would begin to materialize.

Microsoft’s cloud revenues increased 20% in the last quarter of 2023 to $25.9 billion, beyond analysts’ projections of $25.3 billion. Sales growth for Azure reached 30% of total revenue.

Azure revenues increased by 6 percentage points in the quarter due to demand for Microsoft’s AI services, which is an acceleration of the roughly 3 percentage point increase in sales in the preceding three months.

Given the growing need for generative AI, Google Cloud will also be a key growth driver for Alphabet. Investors are eagerly awaiting the release of Gemini Ultra, the most sophisticated version of Bard, the company’s chatbot, which will be released this year.

According to Forrester researcher Lee Sustar, consumers of Alphabet and Microsoft were in a “buy AI now, figure it out if it works later” mindset. Similar “AI-everywhere strategies” employed by the corporations would put rival Amazon under pressure to “ramp up AI services to defend its cloud market share leadership.”

Satya Nadella, the CEO of Microsoft, reported that the company currently has 53,000 Azure AI users, with over a third having signed up within the last year, and that the number of “billion-dollar-plus Azure commitments” is rising. However, it anticipates that Azure growth would be steady and revenue growth at its cloud segment will slow down slightly to 18–19% in the current quarter.

Vice-president of investor relations Brett Iversen stated that although Microsoft was spending in data centers and servers to expand its AI infrastructure capacity, the company has not yet seen a decline in profit because of the growing demand for cloud services and “cost control” in other areas.

In a Tuesday earnings release, semiconductor manufacturer AMD increased its forecasts for AI chip sales by $1.5 billion for 2024, citing Microsoft and other clients as having deployed its new MI300 chips—which rival Nvidia—earlier than anticipated.

Amy Hood, the chief financial officer of Microsoft, stated that the company anticipated a “material increase” in capital spending, which would be fueled by investments in cloud and AI infrastructure. She also stated that the company was “pivoting” to a “AI-first” workforce instead of recruiting a big staff to concentrate on the technology.

The number of users of Microsoft 365 Copilot, a generative AI assistant included within the business’s suite of productivity products, has been a subject of great interest for analysts. The tool, which is available to both individuals and small and medium-sized enterprises, is priced at $30 per user each month for businesses.

Although the business does not release Copilot’s sales or user numbers, Nadella compared the product’s quick uptake to the early days of the PC, which after being used for a while by early adopters became a “standard issue.”

Compared to projections of $61.1 billion, Microsoft’s total revenue for the three months ending at the end of December increased by 18% to a record $62 billion. The $2.93 earnings per share well exceeded the $2.77 predicted by analysts.

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