The Growing Importance of AI for Microsoft and Alphabet

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As Microsoft Corp. and Alphabet Inc. continue to prioritize artificial intelligence (AI), they are increasingly engaging with the investment community to discuss its potential impact on their businesses and services.

Preparing for the AI Surge

Both Microsoft MSFT, +1.70% and Alphabet GOOGL, +0.56% GOOG, +0.75% have been investing in AI long before it gained widespread attention. The sudden interest in AI among investors was sparked by the rapid rise of chatbot ChatGPT last winter. Since then, executives from both companies have significantly increased their discussions around AI.

AI Takes Center Stage

During their recent earnings calls, both Alphabet and Microsoft shed light on how AI is reshaping their strategies:

  • Alphabet mentioned “AI” or “artificial intelligence” 90 times, while Microsoft mentioned it 73 times–a new record for both companies.
  • According to Philipp Schindler, Alphabet’s Chief Business Officer, AI has been a core component of their ad business for years. He stated that nearly 80% of advertisers already utilize at least one AI-powered search ads product. He emphasized that their approach is grounded in providing real value to businesses and users.
  • Sundar Pichai, the CEO of Microsoft, highlighted the growing demand for AI applications from their customers. He reaffirmed Microsoft’s commitment to continuous innovation across their technology stack to help customers thrive in the era of AI.

In conclusion, both Microsoft and Alphabet are doubling down on their AI investments, recognizing its transformative potential for their respective businesses. They are determined to leverage AI to drive value for their customers and stay ahead in this new era.

The Revenue Opportunity in AI

The AI industry has made significant progress, with Microsoft and Alphabet emerging as leaders in the field. As a result, Wall Street is becoming increasingly curious about the revenue potential of this technology and its associated costs.

Microsoft’s Outlook

During a recent earnings call, Microsoft’s Chief Financial Officer Amy Hood acknowledged the steady demand and their prominent position in the market. However, she stated that the growth derived from their AI services would be gradual as they continue to scale Azure AI and finalize the general availability dates for their copilot offerings. Hood also emphasized that the company would need to invest heavily to enhance its capabilities. Their capital expenditures are expected to increase as their new fiscal year progresses.

Hood mentioned that the acceleration in capital expenditures would be comprehensive, covering various aspects such as data centers, physical infrastructure, CPUs, GPUs, and networking equipment. This broader approach reflects Microsoft’s commitment to expanding their AI offerings.

Alphabet’s Investment

Alphabet’s CFO, Ruth Porat, highlighted the substantial investment in AI compute as a significant component of their second-quarter capital expenditures. While other factors affected their Q2 capex figures, Porat clarified that they anticipate higher levels of investment in their technical infrastructure throughout the latter half of 2023.

Porat emphasized that the primary driver behind this increased investment is the numerous opportunities they see in AI across the company. Specifically, she mentioned their investments in proprietary TPUs, GPU utilization, and data center capacity.

Overall, it is evident that both Microsoft and Alphabet recognize the long-term value of AI. However, it is crucial for investors to remain patient, as the full financial benefits of these investments will take some time to materialize.

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