Microsoft Wins Over Alphabet In Generative AI Commercial Competition, Check Out The Review

Microsoft managed to edge out Alphabet in the race to monetize artificial intelligence with Copilot. (photo: twitter @satyanadella)

JAKARTA - Microsoft managed to edge out Alphabet in the race to make money from generative artificial intelligence through early projects on OpenAI and a focus on big clients. This raises concerns that Google's parent company could lose market share in the cloud computing business.

Cloud computing spending by businesses preparing to launch artificial intelligence features drove Microsoft Azure's growth in its first quarter. It also lifted shares of the Windows maker  nearly 4% on Wednesday, October 25.

However, in sharp contrast, growth in Alphabet's cloud computing unit hit its lowest level in nearly three years as its exposure to smaller clients dampened its growth. This, in fact, sent the company's shares down more than 9%.

In the race to catch the next driver of growth for cloud computing businesses, Microsoft is focusing on its core business clients who already use many of its software services, while Google is focusing more on startups.

“Demand for artificial intelligence is driving Microsoft's growth. "Demand among Google's large clients is similar, but the company is more exposed to high-growth clients and startups, which are more aggressive in their cost control efforts," said Morningstar analyst Ali Mogharabi.

If the loss of market share continues, Alphabet is predicted to wipe out more than 150 billion US dollars (Rp. 2,380.3 trillion) from its market value. It points to concerns that its focus on startups and slower rollout of artificial intelligence services has hampered profits from the technology.

The increase in Microsoft shares is expected to add around 100 billion US dollars (Rp. 1,587 trillion) to its market capitalization.

“Microsoft is leveraging existing software relationships, whereas Google is emerging as a minor competitor here,” said Krishna Chintalapalli, portfolio manager at Parnassus Investments, an investor in Alphabet and Microsoft.

According to Chintalapalli, the results show cloud computing spending came from business clients, while small businesses reduced their spending.

The strong use of artificial intelligence was responsible for a 3 percentage point increase in Microsoft's cloud computing business in the September quarter.

CEO Satya Nadella said about 40% of Fortune 500 companies are using a trial version of the artificial intelligence service "Copilot" powered by OpenAI technology.

The company will launch a $30-a-month offering next month for its 365 service that can boil down a day's worth of emails into a quick update.

Analysts say that this will further increase the adoption of its artificial intelligence services. Alphabet has also implemented artificial intelligence in products such as its flagship Pixel phone and recently tested adding generative artificial intelligence to its search engine.

"Unlike many others who tout their artificial intelligence stories, Microsoft is able to deliver meaningful artificial intelligence products to their customers," said securities firm D.A. Davidson.

At least 22 securities firms raised their price targets for the software company, pushing their median view to $400. This figure is 17% higher than the company's last share price of 342.78 US dollars.

Many analysts are also optimistic about the strength of Alphabet's core search business, but they warn that weakness in its cloud computing business will continue.

"It will take time to know the extent of Google Cloud's optimization efforts and where customers are on this journey, but expect these headwinds to continue for at least a few more quarters," Bernstein analysts said.

Artificial intelligence is expected to be a bigger growth driver in 2023 for Alphabet after the expected launch of Gemini, which is a collection of large language models.

"The initial results are very promising (for Gemini)," said CEO Sundar Pichai, quoted by VOI, from Reuters.

Microsoft trades at about 28.5 times estimated forward 12-month earnings, compared with parent company Google's 24.93.