{"id":20246,"date":"2023-12-10T14:00:55","date_gmt":"2023-12-10T14:00:55","guid":{"rendered":"https:\/\/redbigfoot.com\/?p=20246"},"modified":"2023-12-11T14:01:34","modified_gmt":"2023-12-11T14:01:34","slug":"cloud-computing-growth-is-the-new-benchmark","status":"publish","type":"post","link":"https:\/\/redbigfoot.com\/cloud-computing-growth-is-the-new-benchmark\/","title":{"rendered":"Cloud computing growth is the new benchmark"},"content":{"rendered":"\t\t
<\/p>\n
Microsoft (US:MSFT)<\/strong>,\u00a0Amazon (US:AMZN)\u00a0<\/strong>and\u00a0Alphabet (US:GOOGL)\u00a0<\/strong>may be the market’s darlings, but right now\u00a0the only thing investors really care\u00a0about is their cloud computing performance. Microsoft and Alphabet both reported their recent third-quarter results on the same day, and both beat consensus earnings expectations. However, Microsoft\u2019s share price rose 4 per cent and Alphabet\u2019s fell 9 per cent.<\/p>\n <\/p>\n <\/p>\n The reason? Microsoft\u2019s earnings beat was built on the back of cloud computing while Alphabet\u2019s was due to a recovery in its advertising market.<\/p>\n <\/p>\n <\/p>\n Microsoft\u2019s cloud computing division, Azure, grew 29 per cent year on year in the three months to September, exceeding market expectations of 26 per cent. This extra growth came from artificial intelligence (AI), with chief financial officer Amy Hood confirming that roughly three percentage points came from AI services. \u201cWhile the trends from [the] prior quarter continued, growth was ahead of expectations, primarily driven by increased graphics processing unit (GPU) capacity and better-than-expected GPU utilisation of our AI services,\u201d said Hood.<\/p>\n <\/p>\n <\/p>\n In the three months to September, Alphabet’s revenue increased 11 per cent to $76.6bn (\u00a363bn), which was 1 per cent ahead of market expectations. Meanwhile, earnings per share rose 46 per cent to $1.55, more than 6 per cent ahead of analyst predictions. The problem was Google Cloud. It ‘only’ grew 22 per cent year on year, a slowdown from 29 per cent last quarter and below what analysts were hoping for.<\/p>\n <\/p>\n <\/p>\n On Thursday, Amazon\u2019s share price was up just 5\u00a0per cent despite its earnings smashing broker expectations. Between, Monday and Friday of that week its share price was basically flat.\u00a0This evident disappointment was linked again to its cloud division, which made $23.1bn \u2013 slightly behind the $23.2bn forecast. This 12 per cent year-on-year growth was the same as last quarter. Thankfully for investors, earnings per share of $0.96 was more than 60 per cent ahead of expectations, thanks to a surprisingly strong performance from its retail and advertising\u00a0businesses.<\/p>\n <\/p>\n <\/p>\n On the earnings call, chief executive Andrew Jassy was keen to ease fears that the company had fallen behind in the AI race. He mentioned the custom Trainium chip it has designed, the recent deal with OpenAI rival Anthropic and its \u2018AI-as-a-service\u2019 platform called Bedrock. He\u00a0name-checked customers building AI apps on the platform, including Adidas, Booking.com,\u00a0Relx\u00a0(REL)<\/strong>,\u00a0Merck (DE:MERK)<\/strong>\u00a0and\u00a0United Airlines (US:UAL)<\/strong>.<\/p>\n <\/p>\n <\/p>\n In total, the phrase \u2018generative AI\u2019 was used 31 times on the call as management laid on the point thickly. \u201cIt\u2019s a gigantic new generative AI opportunity which I believe with be tens of billions of dollars of revenue for AWS over the next several years,\u201d said Jassy<\/p>\n <\/p>\n <\/p>\n Microsoft, Alphabet and Amazon\u2019s share prices have risen this year, not because of their legacy businesses, but because of their cloud computing potential. All have spent billions on capital expenditure\u00a0to build out the physical infrastructure needed for widespread AI adoption.<\/p>\n <\/p>\n <\/p>\n <\/p>\n <\/p>\n The problem for Amazon and Alphabet is that they have legacy businesses which are mostly unrelated to cloud computing. Amazon is dragging along one of the world\u2019s biggest retail businesses, which struggles to\u00a0break even. AWS has an operating margin of 30 per cent but it makes up just 16 per cent of total revenue.<\/p>\n <\/p>\n <\/p>\n Similarly, 78 per cent of Alphabet\u2019s revenue comes from advertising through YouTube and Google Search, while just 19 per cent comes from the cloud. The upside is that advertising is a profitable business, with operating margins of around 35 per cent, but it is not a growth industry. Digital advertising is now dominant and won\u2019t grow much faster than the wider economy.<\/p>\n <\/p>\n <\/p>\n The advantage Microsoft has is the\u00a0crossover with\u00a0its legacy business. Microsoft has more than 300mn Office 365 users, most of whom use their software ‘on-premise’. In other words, they downloaded the software onto their own computers and servers, rather than accessing it through Microsoft Azure.\u00a0<\/p>\n <\/p>\n <\/p>\n Now, through its strategic investment in OpenAI, Microsoft\u00a0has moved ahead of its competitors. It has already launched Github Copilot, an AI assistant which speeds up coding and has more than 1mn\u00a0paid users and 37,000 organisations subscribed. It is now rolling out an Office 365 Copilot, which will add generative AI to its suite of Office 365 products, including Excel, Word and Powerpoint.<\/p>\n <\/p>\n <\/p>\nMicrosoft’s big advantage\u00a0<\/strong><\/h2>\n