This week, some of the largest technology companies in the world demonstrated how their substantial investments in artificial intelligence (AI) are beginning to yield returns. They also indicated that further investments are on the horizon.
In the last quarter, Amazon, Microsoft, and Google generated a combined revenue of $62.9 billion from their cloud operations. This figure marks a 22.2% increase compared to the same period last year and represents at least the fourth consecutive quarter of rising growth rates for these companies. This surge in cloud computing revenue is a strong indicator that spending from AI clients is starting to validate the significant investments that these tech giants have made in infrastructure to support AI technology.
Microsoft’s Chief Financial Officer Amy Hood highlighted this growing demand, stating during a call with analysts that “demand continues to be higher than our available capacity.”
There has been ongoing concern among investors regarding the possibility of overspending by Silicon Valley on cloud capabilities, as many anticipate that AI will drive growth comparable to the internet’s early days. This anxiety over capital expenditures has caused fluctuations in the stock market, as evidenced by a 2.8% decline in the tech-heavy Nasdaq Composite Index on Thursday.
In a revealing disclosure, Amazon, Microsoft, and Alphabet (Google’s parent company) announced that their combined expenditures on property and equipment reached $50.6 billion last quarter, significantly up from $30.5 billion in the same quarter last year. A large portion of this expenditure has been allocated towards developing data centers that are essential for powering AI technologies.
All three companies have also cautioned investors that their spending is set to increase in the coming months. Meta Platforms, which is also investing in the infrastructure necessary for its AI applications on platforms like Instagram, WhatsApp, and Facebook, has similarly signaled plans for greater expenditures. Last quarter, Meta invested $8.3 billion in new property and equipment, an increase from $6.5 billion in the same quarter a year earlier, as it strives to create the most widely used AI assistant.
Mark Zuckerberg, CEO of Meta, stated, “Our AI investments continue to require serious infrastructure, and I expect to continue investing significantly there.”
Despite the optimism surrounding AI, some skeptics remain uncertain about the sustainability of the current excitement and whether it will translate into long-term growth sufficient to justify these expenditures.
However, investors found a glimmer of hope in the strong performance of the cloud services sector, which offers computing storage and processing capabilities to businesses. After facing a slowdown in early 2022—following a decade-long boom driven by cloud migration—the cloud market has seen a revival, largely due to increased spending by AI developers who require more computational power than traditional software firms.
“The data center cloud business is strong,” remarked Dan Morgan, a portfolio manager at Synovus Trust, which has investments in all three major cloud providers. “Of all the groups, this is the one where we can show the most tangible evidence of the impact of AI, apart from chip sales.”
Google, which has historically held the third position in the cloud services market, reported a remarkable 35% increase in its cloud revenue during the third quarter, surpassing Wall Street’s expectations. This positive news led to a 3% rise in Alphabet’s stock on the day following the earnings report.
Amazon also saw its stock jump nearly 6% in after-hours trading on Thursday after announcing a continued acceleration in its cloud growth. CEO Andy Jassy indicated that Amazon’s cloud AI sector is on track to generate billions in annual revenue and is experiencing growth at a triple-digit rate, outpacing the overall growth of Amazon Web Services.
Conversely, Microsoft’s stock dropped by 6% on Thursday after it revised its growth projections downward for its cloud division, attributing this adjustment to challenges in rapidly expanding its data center capabilities. However, analyst Brad Reback from Stifel suggested that Microsoft’s long-term outlook remains positive, asserting, “It’s a short-term disappointment, but I don’t think the quarter disrupts our longer-term perspective that Microsoft is a leader in generative AI.”
Microsoft reported that in the current quarter, sales related to AI products and cloud services are expected to exceed $10 billion annually for the first time.
Microsoft, Amazon, and Google are all racing to develop their own AI offerings for both consumers and businesses. Notable examples include Google’s Gemini and Microsoft’s Copilot. However, their cloud operations are poised to be their primary means of capitalizing on the growing adoption of AI technology in the near term.
Moreover, private AI firms like OpenAI and Anthropic are in a competition to create larger, more advanced AI systems capable of handling complex tasks, necessitating the assembly of vast networks of interconnected chips—a daunting challenge for startups to undertake alone.
Microsoft stands as the largest investor in OpenAI, while Google and Amazon have invested billions in Anthropic. The major tech companies rent cloud services to their respective startups, recouping part of their investment, and also market their AI applications to clients.
Microsoft has reported that usage of its service providing access to OpenAI’s technology via the cloud has doubled in the last six months, with notable clients including AI startups like Grammarly and Harvey.
Additionally, Oracle, the fourth-largest cloud provider in the U.S., is making significant investments to meet the rising demand for AI infrastructure that the leading three companies cannot fulfill. Oracle’s fiscal quarter ends in November, with earnings reports expected in December.