Microsoft’s AI lead puts Amazon cloud dominance on watch

Upcoming quarterly reports from US tech giants may show Microsoft (MSFT.O) is closing the gap on cloud-computing market leader Amazon.com as more businesses switch to its services, attracted by a clutch of generative AI features that are powered by OpenAI’s technology.

The Redmond, Washington-based software giant has beaten rivals Amazon (AMZN.O) and Google-parent Alphabet (GOOGL.O) to the market with AI services including the Copilot, a set of genAI tools that work in Microsoft’s business apps, that was rolled out in November for $30 a month.

Its earnings on Thursday will be an indicator of AI adoption and could influence the movement of technology stocks as a rally in the sector eases this month amid worries that interest rates in the US could stay high for longer.

Wall Street analysts expect Microsoft – which overtook Apple as the world’s most valuable firm earlier this year – to report that the billions of dollars it has invested in generative AI were attracting clients to its Azure cloud-computing service.

“Azure is benefiting from a halo effect around Microsoft’s AI strategy,” said RBC Capital Markets Rishi Jaluria, who expects Microsoft to take Amazon’s market share.

Jaluria added that cloud providers should broadly benefit from signs of stabilization in technology spending, which has been pressured by high-interest rates and economic uncertainty.

In the first three months of 2024, Microsoft’s revenue is expected to have grown 15 per cent and Alphabet’s 12.6 per cent – their second-highest rate in nearly two years. Amazon’s revenue could rise 11.9 per cent, its worst in three quarters.

Azure, part of the Intelligent cloud unit at Microsoft, is expected to have grown 28.9 per cent in the January-to-March period, according to estimates from Visible Alpha.

That compares with estimated growth of 14.9 per cent for Amazon Web Service and 25 per cent for Google Cloud, the third-largest cloud provider, according to LSEG data. Google-parent Alphabet reports earnings on Thursday and Amazon on April 30.

CFRA Research analyst Angelo Zino estimated that up to 8 percentage points of Azure’s growth could come from AI services.

Still, much of the boost from AI is expected to be realized from next year, with Morgan Stanley analysts estimating a $5 billion revenue contribution from Copilot in Microsoft’s fiscal 2025, which would start in July.

“Broader elements of generative AI story (like 365 Copilot) likely need more time to develop and work through enterprise purchasing cycles,” Morgan Stanley said earlier this month.

While Alphabet shares have gained over 13 per cent so far this year and recently scaled a record high on optimism over its AI efforts including the Gemini models, several analysts said the company was not rushing to monetize the technology and that it may take longer for Google Cloud to benefit from AI integration.

Google offers a slew of AI features within Workspace productivity apps, which are powered by its large language model Gemini, for up to $30 per user per month. Earlier this month, it announced two $10 add-on packages for AI meeting notes and summaries, and for added security features.

“Our checks at Google Cloud Next conference showed high interest levels and abundant innovation, but no rush to turn AI pilots into production apps,” said analysts at Jefferies, who see a more meaningful boost in 2025.

Amazon has not announced any major AI moves but is weaving the technology into AWS on the back of its $4 billion investment in OpenAI-competitor Anthropic.

“Microsoft has gained a lot of ground last year based on its AI prominence, but AWS is still a much bigger business and we expect Amazon to catch up to those capabilities over the next couple of years,” said D.A. Davidson and Co analyst Gil Luria.