Microsoft is still winning the cloud war against Google — but in AI, it’s all to play for

• Microsoft and Google beat earnings estimates amid an intensifying rivalry over AI and cloud growth.
• Google’s growth was fueled by AI progress, while Azure remains key for Microsoft.
• Both companies are spending big on AI, and investors are waiting to see that translate into returns.

Microsoft may be ahead of Google in cloud computing, but the two tech giants are still battling for AI dominance — and ramping up their multibillion-dollar expenditures in the process.

Both Big Tech companies reported earnings this week, beating analysts’ estimates.

Google Cloud revenue grew 35% year over year to $11.4 billion, which the company said was bolstered by “accelerated growth” in its AI products.

Microsoft’s Intelligent Cloud segment, which includes Azure, increased by 20% year over year to $24.1 billion.

Earlier this week, Microsoft dialed up the pair’s cloud rivalry, accusing Google of running “shadow campaigns” to influence European cloud regulation. In response, Google told BI it had been “very public” about concerns with Microsoft’s cloud licensing.

While Google reported stronger cloud growth, Microsoft still leads it in cloud market share, with both behind leader Amazon Web Services.

Cloud is a particularly important segment for Microsoft. Jeremy Goldman, EMARKETER’s senior director of briefings, called Azure “the linchpin of Microsoft’s growth strategy.” He said that while Microsoft’s cloud business showed strong enough gains, it decelerated from the “breakneck pace” of previous quarters.

Tracy Woo, principal analyst at Forrester, told BI: “Google Cloud is growing but from a much smaller place in the market. Google is much much further behind in the market as far as market traction goes. It will take much bigger customer gains for it to come remotely close to Azure’s size.”

All eyes on AI

Wall Street is also closely watching for returns on AI investments from the two companies and Big Tech across the board.

Investors have been eyeing revenue expectations as companies invest heavily in AI research and development, keeping a close eye on capex expenditures.

Microsoft said on Wednesday that it had spent $20 billion on AI capital expenditures for the quarter, almost double the $11.2 billion spent in the first quarter a year earlier.

In contrast, Alphabet’s capex rose 62% to $13 billion in the third quarter.

AI was a key driver in Google’s quarterly growth, with CEO Sundar Pichai saying the company’s AI investments are already “paying off.” The company’s shares were up more than 5% in after-hours trading but fell on Thursday.

Microsoft, which reported earnings on Wednesday, saw its shares dip 3.7% in premarket trading on Thursday and fell further throughout the day.

Jake Behan, head of capital markets at Direxion, said that there were still lingering concerns about Microsoft not fully capitalizing on its AI investments, which could have contributed to the dip in share price.

AI winners and losers

Google acquired leading British AI startup DeepMind in 2014. But Microsoft’s early investment in OpenAI, the company behind ChatGPT, has left Google battling a narrative — deserved or not — that it has fallen behind in the AI race.

However, Google’s revenue and cloud business growth may be early signs that Alphabet’s AI spending is already paying off. The company has also successfully incorporated AI into its own operations, with Pichai saying that more than a quarter of new code at Google is made by AI and then checked by employees.

Woo said that Google was “caught flat-footed with the announcement of Microsoft and its Open AI partnership and subsequent release of Copilot.”

She added: “It doesn’t surprise me that Azure is slowed in growth because Google had a lot of ground to make up as far as AI goes. Google has now been able to turn some of its early AI blunders into real market momentum that were used to seeing from Google.”

In a note, BofA Securities called Google’s Cloud growth a “positive surprise” that suggested the “AI growth cycle has arrived.”

In contrast, EMARKETER’s Goldman said that while Microsoft’s fundamentals are solid, “the market needs reassurance that these massive AI and cloud investments will drive real growth.”

It’s still up for debate who will emerge victorious in the wider AI race. It depends on how successfully and quickly both companies can deliver on AI.

“Capex expenditures relating to AI are the main focus,” Behan said. “The companies that can monetize those expenses will be the winners, and those who cannot will be the losers.”