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Alphabet shares sink as Microsoft extends cloud lead with focus on OpenAI

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Microsoft Logo Photo Creator: Jean-Luc Ichard

In the battle to profit from generative artificial intelligence, Alphabet’s cloud unit’s growth reached almost a three-year low on Wednesday, sending its shares plunging. This paled in comparison to Microsoft’s relative success.

Investor concerns that Google’s parent company may lose market share to Microsoft in the cloud computing space caused Alphabet’s shares to drop 9.6% on Wednesday. In comparison, Microsoft’s saw a strong 2.8% increase.

Cloud spending by businesses preparing to introduce AI features drove a surge in growth for Microsoft’s Azure platform during the first quarter of the year. Its significant exposure to smaller clients slowed Alphabet’s cloud division’s growth.

Microsoft is trading at 28.5 times its projected 12-month earnings, while the parent company of Google is trading at 24.93 times.

Microsoft has concentrated on its core corporate clients, who currently utilize many of its software services, in the fight to find the next cloud industry growth driver, while Google has turned to startups.

“The need for AI propelled Microsoft’s expansion. A similar demand was seen among Google’s larger clients. Still, Morningstar analyst Ali Mogharabi said that the company is more exposed to high-growth and startup clients, who have been more active in their cost-control initiatives.

Investors may be worried that Alphabet’s concentration on startups and its delayed roll-out of AI services are delaying the new technology’s potential to improve revenues based on share declines.

Google Cloud’s Vertex platform provides AI capabilities. In the fierce competition for generative AI, the business is attempting to shift its emphasis from research to commercial releases through the DeepMind team. Microsoft claims that this alliance enables it to move more quickly.

At Tuesday’s results conference, Google CEO Sundar Pichai announced the company’s plans to release several AI models, including the highly anticipated Gemini, in the upcoming year.

Given that OpenAI’s GPT-4 model has been accessible for months, experts are curious whether this timeframe would present an opportunity for Microsoft to increase its market share in the AI cloud.

In addition to its proprietary model solutions, Google has teamed with Meta’s Llama models and invested in AI company Anthropic to provide its cloud users with a wide range of models.

According to the business, more than half of financed AI startups use Google Cloud; nevertheless, it is unclear if its robust research and technological prowess will be enough to lure high-end commercial clients away from Microsoft and AWS.

“Google is entering as a small competitor here, while Microsoft is leveraging its established software relationships,” stated Krishna Chintalapalli, portfolio manager at Parnassus Investments, an investor in Alphabet and Microsoft.

According to the data, he added that enterprise clients make the most cloud-related purchases, while smaller companies are cutting down.

The September quarter saw a three-point increase in Microsoft’s cloud business due to the company’s strong usage of AI.

CEO Satya Nadella said over 40% of Fortune 500 businesses utilized the test version of OpenAI’s “Copilot” AI service.

The company’s 365 service, which can condense a day’s worth of emails into a brief update, will go live next month for $30 a month.

According to analysts, this will increase the use of its AI services even more. Additionally, Alphabet has incorporated AI into its flagship Pixel phones and, more recently, experimented with integrating generative AI into its search engine.

“Unlike many others who are touting their AI story, Microsoft is capable of delivering meaningful AI products to their customers,” stockbroker D.A. Davidson stated.

Compared to $340 per share on Wednesday, at least 22 brokerages increased their price goals for the massive software company, bringing their median estimate to $400.

Numerous analysts expressed optimism for Alphabet’s core search business but cautioned that the cloud business would continue to be sluggish.

“It’s unclear just how widespread Google Cloud optimization efforts are and how far along customers are in the journey, but expect these headwinds to persist for at least a few more quarters,” Bernstein analysts stated.

In 2023, AI is anticipated to become a bigger growth driver for Alphabet with the anticipated release of Gemini, a suite of large-language models.

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