Contrasting Cloud Performances: Microsoft vs Alphabet

In the world of cloud computing, Microsoft and Google-parent Alphabet found themselves on opposite ends of the spectrum. While Microsoft's Azure impressed, Google Cloud left much to be desired. And the reason behind this divergence seems to lie in the realm of artificial intelligence (AI).

Microsoft (ticker: MSFT) and Alphabet (GOOGL) directly compete in the provision of remote IT services over the internet. Recent figures indicate that Microsoft is gaining market share from its rival, with analysts attributing this to the demand for its AI capabilities.

Despite both companies being players in the AI space, they differ in their willingness to disclose AI-related figures. Microsoft openly shares the contribution of AI to its cloud business, revealing that it accounted for three percentage points of Azure's overall 28% growth in the September quarter compared to the same period last year. This indicates accelerated growth.

On the other hand, Alphabet does not provide a separate breakdown of the AI contribution to its 22% increase in Google Cloud revenue. Unfortunately for Alphabet, this slower growth rate raised concerns about Microsoft taking away market share from them.

Concerns over Market Share

In a recent report by KeyBanc analyst Justin Patterson, it is noted that Google Cloud Platform continues to experience growth that surpasses reported results. However, limited disclosures have raised concerns that Google may be losing market share to Microsoft Azure. This is particularly alarming for Alphabet, as Microsoft's cloud business is already much larger.

A Competitive Strategy

The question that arises now is whether Alphabet can successfully convince the market that its cloud-computing platform will remain competitive against Microsoft's OpenAI-powered offering. Alphabet CEO Sundar Pichai has expressed that the company is currently focusing on laying the foundation for the launch of the next generation of AI models throughout 2024. Pichai further added that there has been a significant amount of interest in the technology.

Analyst Opinions

While uncertainties loom, analysts at D.A. Davidson reiterated their Buy rating and a $415 target price for Microsoft. On the other hand, KeyBanc's Patterson has lowered the target price for Alphabet to $153 from $155 while maintaining an Overweight rating on the stock.

Market Reactions

In response to these developments, Microsoft shares saw a 3.7% increase in premarket trading on Wednesday, reaching $342.63. Conversely, Alphabet shares experienced a 6.8% decline, reaching $129.38.