{"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
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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

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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

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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

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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

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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

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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

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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

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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

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Microsoft’s big advantage\u00a0<\/strong><\/h2>\n

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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

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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

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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

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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

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Analysts like the fact Microsoft already has a large base of customers to whom it can upsell its AI products. \u201cMicrosoft is still in the early innings of a major opportunity with AI and we think its cloud product could reach 50 per cent of its install base,\u201d said Dan Ives from Wedbush Securities.<\/p>\n

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To use these AI products, customers must be on the cloud. Software was traditionally run \u2018on-premise\u2019. However, the computing power needed to run AI-enabled software means it must be done on the huge cloud servers. For Microsoft, it can go to its existing customers, sell them its new AI software and then transition them to the cloud.<\/p>\n

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IT\u00a0services company\u00a0Bytes Technology (BYIT)<\/strong><\/a>, Microsoft\u2019s largest reselling partner in the UK, is starting to benefit from the AI interest. In the six months to August, its gross invoiced income was up 38 per cent year on year. \u201cWe have been inundated with queries about AI and how to prepare to onboard this technology and what kind of infrastructure they need,\u201d chief executive Neil Murphy\u00a0told\u00a0Investors\u2019 Chronicle<\/em>\u00a0last week<\/a>.<\/p>\n

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Cloud exposure,\u00a0without the rest\u00a0<\/strong><\/h2>\n

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If investors just want cloud computing exposure, there are software infrastructure companies that aren\u2019t held back by any slow-growth legacy businesses.<\/p>\n

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Cloud monitoring company\u00a0Datadog (US:DDOG)<\/strong>\u00a0allows customers to monitor their technology stack and collect data on\u00a0cloud usage, network traffic and memory. It’s rather\u00a0like having a smart meter for cloud computing costs.\u00a0<\/p>\n

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In the three months to June, Datadog\u2019s revenue rose 25 per cent to $509mn. Meanwhile, the\u00a0number of customers with more than\u00a0$100,000 of annual recurring revenue rose 24 per cent to 2,990. It has just announced a large language model (LLM) \u201cobservability solution\u201d. In other words, if a company builds a chatbot using its proprietary data, as Relx\u00a0has done with its AI Legal Assistant, it can use Datadog\u2019s software to monitor its functionality and detect issues.<\/p>\n

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The other infrastructure beneficiary is cloud data storage and analysis company\u00a0Snowflake (US:SNOW)<\/strong>. Its software allows customers to collate and analyse their data in the cloud, and with the growth of generative AI the returns on being able to organise and process data grow\u00a0substantially.<\/p>\n

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Its new product, Snowpark, allows customers to train AI models on the underlying Snowflake data, rather than ingesting it into the platform, cleaning it, then exporting it to train and run proprietary models. Snowflake’s $2.1bn of revenue in\u00a0the year to January was up 248 per cent on two years ago.\u00a0<\/p>\n

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The promise for these companies lies in the\u00a0flywheel effect. As AI improves, software solutions to problems arising will become cheaper. Research\u00a0from GitHub\u00a0showed that developers are 55 per cent more efficient using Github Copilot. Of course, these exact numbers can be debated, but AI\u00a0is undeniably making development easier. This means more software solutions to problems and more data to be analysed, and more cloud infrastructure services.<\/p>\n

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Soon, all telephone communications will be done in the cloud. In 2025,\u00a0BT (BT.)\u00a0<\/strong>is shutting down its public switched telephone network (PSTN), which will force all communication onto fibre-optic cables. This is part of the investment case for\u00a0Gamma Communications (GAMA)<\/strong><\/a>, whose software allows businesses\u00a0to make calls over the internet using their existing telephone number. This will be in the cloud, where conversations will be stored as data and probably used to build AI call centre products.\u00a0Read more on Gamma here<\/strong><\/a>.<\/p>\n

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As the economy stumbles, it is rare to find growth in places that aren’t linked to cloud computing, data storage and generative AI. With billions of dolllars invested, it has to work. Even slight stumbles towards this promised future can be hugely damaging.\u00a0<\/p>\n

Source:\u00a0https:\/\/www.investorschronicle.co.uk\/news\/2023\/10\/30\/cloud-computing-growth-is-the-new-benchmark\/<\/a><\/p>\n

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Microsoft (US:MSFT),\u00a0Amazon (US:AMZN)\u00a0and\u00a0Alphabet (US:GOOGL)\u00a0may 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. The […]<\/p>\n","protected":false},"author":6,"featured_media":20253,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[58],"tags":[61],"yoast_head":"\nCloud computing growth is the new benchmark - Red Bigfoot IT<\/title>\n<meta name=\"description\" content=\"Microsoft\u2019s share price rose 4 per cent and Alphabet\u2019s fell 9 per cent. The reason? 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