Friday, February 23, 2024

Microsoft’s AI growth is helping its cloud business weaken Amazon’s lead

Microsoft CEO Satya Nadella appears at the World Economic Forum in Davos, Switzerland, January 16, 2024.

Chris Ratcliffe | Bloomberg | Getty Images

Amazon Web services remain the leader in the cloud. But Microsoft quickly closes the gap.

Although Microsoft doesn’t disclose revenue figures for its Azure cloud infrastructure, analyst figures suggest that five years ago it was half the size of AWS. Today, it is about three-quarters the size of its main rival, analysts estimate.

Part of Microsoft’s recent momentum is due to artificial intelligence.

Amy Hood, the company’s chief financial officer, said during Microsoft’s Jan. 30 earnings conference call that 6 points of revenue growth in the Azure and Cloud Services division came from AI in the latest period. , compared to 3 points the previous quarter.

In total, Azure revenue grew 30% in the quarter, compared to 13% year-over-year growth at AWS.

Microsoft has added graphics processing units (GPUs) to its data centers so customers can run AI models in Azure. This includes GPT-4, a large language model that enables text conversations with OpenAI’s ChatGPT chatbot. Many companies have added similar generative AI features to their products.

“We now have 53,000 Azure AI customers,” CEO Satya Nadella told analysts during the company’s earnings conference call.

Jamin Ball, a partner at investment firm Altimeter Capital, said it appears some companies are considering Azure specifically because of the excitement around AI and Microsoft’s perceived lead in the market due to its close relationship with OpenAI.

It took AWS months to come up with a model capable of competing with GPT-4. The company now offers a number of models in addition to its own, including one from Amazon-backed Anthropic. During the company’s fourth-quarter earnings conference call, Amazon CEO Andy Jassy said that AWS offers “the most extensive collection of compute instances with Nvidia chips”, and that customers, including Airbnb And Instant use its local AI processors.

An AWS spokesperson did not respond to a request for comment.

As it stands, Azure is growing much faster.

And as cloud infrastructure has become a larger part of Microsoft, accounting for about 29% of the company’s total revenue, it has also become a significant contributor to profits.

Microsoft, which recently surpassed Apple to become the world’s most valuable public company, generated nearly $83 billion in net profit in 2023, up from $67 billion the previous year. The Intelligent Cloud segment containing Azure generated 46% of Microsoft’s total operating income, up from about 27% in 2016.

In addition to providing basic computing and storage services, Microsoft offers a variety of services to developers, including high-margin databases and monitoring tools.

Microsoft’s cloud group’s gross margin increased from 42% in 2016 to 72% in the most recent quarter. The division includes Office commercial subscriptions, the commercial part of LinkedIn and Dynamics 365 business software as well as Azure. Hood said efficiency gains can come from improvements in power, cooling, data center design, chips and software.

Yun Kim, an analyst at Loop Capital, said in a note that Azure’s revenue growth could accelerate.

“We expect its Azure business to accelerate from next fiscal year (or C2H) as tailwinds from new workloads from new cloud deployments and GenAI initiatives intensify significantly,” he wrote.

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