Cloud Infrastructure

AI Driving Acceleration For Big 3 Cloud Stocks

Posted on February 13, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Forbes Forbes on Feb 8, 2024,07:01pm EST

Big Tech’s participation in the market’s push to all-time highs is becoming increasingly narrow, with Nvidia, Meta, Microsoft and Amazon serving as the primary contributors to 2024’s rally. Though Alphabet fell more than 7% on somewhat disappointing Google ad revenue, Alphabet’s Google Cloud, Microsoft’s Azure, and Amazon’s AWS shined as generative AI products drove an acceleration in cloud revenue growth in the recent quarter.

Source: Trading View

The Big Three’s cloud segments are crucial to business performance on both the top and bottom lines: Azure sits as Microsoft’s fastest growing segment (excluding Xbox’s more than 40 percentage point impact from Activision in Q2), AWS is driving a lion’s share of Amazon’s operating income, while Google Cloud is now generating more than 10% of revenue as Alphabet’s fastest growing segment while expanding its operating margin.

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Microsoft’s Azure

Azure witnessed the strongest AI contribution by far, as Microsoft works to extend its lead as the first major tech player to monetize enterprise and consumer AI subscriptions at scale. Azure also is powering a handful of the largest LLMs and AI assistants on the market, from OpenAI’s ChatGPT to Meta’s Llama and Llama 2 to Microsoft’s own Bing Copilot.

We highlighted in October in our free newsletter that AI would help drive a ‘noticeable acceleration’ for Microsoft’s revenue this year, and that’s exactly what we’re seeing: revenue growth accelerated from 8.3% YoY in fiscal Q4 2023 (calendar Q2) to 17.7% YoY in fiscal Q2 2024 (calendar Q4).

Azure growth was 30% in fiscal Q2, a 200 bp QoQ acceleration driven by strong demand for consumption-based services. Yet AI’s impact was quite notable: Microsoft said the 30% growth rate for Azure included “6 points from our AI services.”

Source: Microsoft

This 6 point contribution is impressive, given that AI services contributed 3 points to growth last quarter and 1 point in fiscal Q4 — a significant ramp considering the scale that this growth is attached to, with Azure’s revenue at a $74 billion run rate. This AI-related growth has helped Azure’s growth re-accelerate after seeing decelerating growth for five straight quarters.

Azure’s AI customer growth has also been rapid, and Microsoft is seeing an increase in larger commitments for Azure. Microsoft reported that Azure AI customers totaled more than 53,000 last quarter, with one-third of these new customers over the past twelve months. That implies customer growth rate of approximately 50% YoY, given that Microsoft added nearly 18,000 customers through 2023. More than half of the Fortune 500 are using Azure OpenAI Services, highlighting the strength of Microsoft’s AI offerings.

For Azure specifically, management said on the earnings call that “customers continue to choose Azure to simplify and accelerate their cloud migrations. Overall, we are seeing larger and more strategic Azure deals with an increase in the number of $1 billion-plus Azure commitments.” An increase in customer count and an increase in deal size are foundations for sustainable long-term growth and supportive of further acceleration in the coming quarters.

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Amazon’s AWS

Q4 was a busy quarter for Amazon as it rolled out many new features, capabilities and hardware designed to capture generative AI demand, with AWS showing a hint of accelerated growth. AWS finally accelerated in Q4 for the first time in 2 yearsQ4 for the first time in 2 years, with Amazon reporting 13.2% growth in Q4, up just over 1 point from Q3’s 12%. AWS is now quickly approaching a $100 billion annual run rate, delivering $24.2 billion in revenue in Q4 and $90.8 billion in revenue for 2023.

What’s more important is that AWS’ operating leverage has improved over the last two quarters, with operating income growing at 3x the rate of revenue in Q4.

Source: Amazon

AWS’ operating income increased 39% YoY on a constant currency basis in Q4, with operating margin increasing 530bp YoY to 29.6%. For the full year, AWS’ operating margin was 27.1%, down 140bp YoY as operating leverage decreased in the first half of the year as growth decelerated from the 20% range to the 12% range.

AWS remains Amazon’s primary generator of operating income (67% of Amazon’s total operating income in 2023), a trend that can strengthen with AI driving accelerated customer and revenue growth and decreased costs. CEO Andy Jassy explained that AWS “added more than $1.1 billion an incremental quarter-over-quarter revenue, which on an FX neutral basis is more than any other cloud provider as far as we can tell.”

AWS’ existing customers “are renewing larger commitments over longer periods and migrations are growing,” and “while cost optimization continued to attenuate larger new deals also accelerated.” That includes recent agreements with Nvidia to be the first CSP to deploy the GH200 Grace Hopper Superchips with multi-node NVLink technology, and with Salesforce to deepen AI and data integrations between the two.

Bedrock is already witnessing strong adoption, with management seeing “many thousands of customers using the service after just a few months” as AWS continues to add “new models from Anthropic, Cohere, Meta with Llama2, Stability AI and our own Amazon Titan family of LLMs.”

Although AWS’ quarterly growth rates look paltry compared to Azure’s 30% and Google Cloud in the high-20% range, it is still showing all the ingredients for a sustained AI-driven acceleration.

Google Cloud

Google Cloud revenue accelerated four points from 22% in Q3 to 26% in Q4, topping $9 billion for the first time, helped by an increasing contribution from AI. Q4’s $9.2 billion in revenue implies that Google Cloud is just crossing above a $36 billion annual run rate, less than half of Azure’s run rate and 60% below AWS’ $90 billion run rate.

Google Cloud’s operating margin in Q4 came in at 9% compared to 3% in the previous quarter and (0.2%) in Q4 last year. Margins are naturally worse than AWS and Azure as Google Cloud does not benefit from the same efficiencies at scale; however, it is positive to see strong QoQ and YoY improvement in operating margin as it bodes well for future performance at a larger revenue scale.

Source: Alphabet

This acceleration in Q4 also helped narrow the gap to 4 percentage points with Azure, compared to 7 percentage points in the previous quarter. Google Cloud had previously topped Azure’s growth rates in late 2022 and the first half of 2023 before a rather swift deceleration in Q3. What’s crucial here over the next few quarters is Google Cloud continuing to close this growth rate gap with Azure, and possibly surpass Azure once more — it should be theoretically easier to realize higher growth rates at a smaller scale, more so when leveraging AI.

Like AWS and Azure, Google Cloud is seeing strong momentum with AI products. Management said that the “strong demand we are seeing for our vertically integrated AI portfolio is creating new opportunities for Google Cloud across every product area,” while its generative AI portfolio helped win and expand deals. CEO Sundar Pichai said that “greater than 70% of gen AI unicorns are using Google Cloud,” and customers including Anthropic and Mistral AI are building and serving LLMs on Google Cloud’s AI Hypercomputer, which combines Google’s “TPUs and GPUs, AI software and Multislice and Multi-host technology to provide performance and cost advantages for training and serving models.”

Google Cloud led the charge in monetizing AI via subscriptions with Duet AI for $30/month, and management noted that customers are “increasingly choosing Duet AI” to “boost productivity and improve their operations.” Duet AI will soon incorporate Google’s Gemini, its multi-modal family of LLMs developed to challenge OpenAI’s GPT-4. Google Cloud is “intensely focused on bringing the benefits of Gemini” to its cloud customers, and the rollout of the top iteration, Gemini Ultra, at a $20/month subscription could help Google gain share away from OpenAI and thus Azure while increasing revenue.

Conclusion

Big Tech’s cloud units reported strong growth in calendar Q4, with AI helping drive a noticeable acceleration for Azure while AWS and Google Cloud touted strong contributions from generative AI products. The trio all possess the necessary ingredients for sustained accelerations or maintained growth at higher levels: increased customer migrations, larger and longer duration contracts, monetization opportunities within the suite via subscriptions, and improvements in productivity and cost reductions for cloud customers.

I/O Fund Equity Analyst Damien Robbins contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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Microsoft Q3 FY23: Strong earnings report

Posted on April 27, 2023June 30, 2026 by io-fund

Microsoft’s Q3 FY23 revenue grew 7% YoY and 10% in constant currency to $52.9 billion. EPS came at $2.45 and was up 10% YoY and 14% in constant currency. The company beat revenue estimates by 3.6% and EPS estimates by 9.6%.

Azure grew by 31% YoY in constant currency and came at the higher end of the management guidance of 30% to 31%.

The management guidance for Q4 FY23 is $54.85 billion to $55.85 billion, representing a YoY growth of 6.7% at the mid-point. It was better than the consensus analyst's YoY growth estimate of 5.9%.

Financials

The company’s revenue in the recent quarter was better than the management guidance across all three segments. Revenue grew by 7% YoY and 10% in constant currency to $52.9 billion. The management guidance was between $50.5 billion to $51.5 billion.

Gross profit grew by 8.8% YoY to $36.73 billion. The gross margin was 69.5% compared to 68.4% in the same period last year. It was also higher than the management guidance of 69.1%. The management guidance for the next quarter is 69.5%. Amy Hood, CFO of the company, said in the earnings call, “Microsoft Cloud gross margin percentage increased roughly 2 points year-over-year to 72%, a point ahead of expectations driven by cloud engineering efficiencies. Excluding the impact of the change in accounting estimate for useful lives, Microsoft Cloud gross margin percentage decreased slightly, driven by lower Azure margin.”a point ahead of expectations driven by cloud engineering efficiencies. Excluding the impact of the change in accounting estimate for useful lives, Microsoft Cloud gross margin percentage decreased slightly, driven by lower Azure margin.”

Operating income grew by 9.8% YoY to $22.35 billion. The operating margin was 42.3% compared to 41.3% in the same period last year. It was higher than the management guidance of 40.2%. The management guidance for the next quarter is 42.1%.

Net income grew by 9.4% YoY to $18.3 billion. The net profit margin was 34.6% compared to 33.9% in the same period last year. EPS was $2.45 compared to $2.22 in the same period last year and beat estimates by 9.6%.

The operating cash flow came at $24.44 billion, with an operating cash flow margin of 46.2% compared to 51.4% in the same period last year. The operating cash flow included the TCJA R&D tax payment of $1.15 billion and the operating cash flow margin, excluding the tax payment is 48.42%. The free cash flow was $17.83 billion with a free cash flow margin of 33.7% and adjusted excluding the tax payment is 35.9% compared to 40.6% in the same period last year. The company has a stable balance sheet with cash and investments of $104.43 billion and a debt of $48.2 billion.

The commercial remaining performance obligation increased by 26% YoY to $196 billion. Roughly 45% is expected to be recognized in revenue in the next 12 months, up 18% YoY and the remaining portion that will be recognized beyond 12 months grew by 34%. The commercial remaining performance obligation increased by 29% YoY to $189 billion in Q2 FY23.

Segments:

The Productivity and Business Processes segment grew by 11% YoY to $17.5 billion and was better than the mid-point of the management guidance of 8%. The guidance for the next quarter is between $17.9B to $18.2B, up 8.7% YoY at the mid-point.

The Intelligent Cloud segment grew by 16% YoY to $22.1 billion and better than the mid-point of the management guidance of 14.7%. Guidance for the next quarter is $23.6B to $23.9B, up 13.6% at mid-point. Microsoft Azure grew by 31% YoY in constant currency and came at the higher end of the management guidance of 30% to 31%. Azure grew by 38% in CC in Q2 FY23 and 49% in the same quarter last year. The management guidance for the next quarter is 26% to 27% in constant currency, which includes roughly 1% from AI services.

Satya Nadella also highlighted Azure gaining market share and the opportunities in AI. He said in the earnings call, “Azure took share as customers continue to choose our ubiquitous computing fabric from cloud to edge, especially as every application becomes AI-powered. We have the most powerful AI infrastructure and it’s being used by our partner, OpenAI, as well as NVIDIA and leading AI start-ups like Adept and Inflection to train large models.”“Azure took share as customers continue to choose our ubiquitous computing fabric from cloud to edge, especially as every application becomes AI-powered. We have the most powerful AI infrastructure and it’s being used by our partner, OpenAI, as well as NVIDIA and leading AI start-ups like Adept and Inflection to train large models.”

Amy Hood, the CFO of the company, also highlighted the strong growth in AI. She said in the earnings call, “In our largest quarter of the year, we expect customer demand for our differentiated solutions, including our AI platform and consistent execution across the Microsoft Cloud to drive another quarter of healthy revenue growth. Last year, we had our largest commercial bookings quarter ever with a material volume of large multiyear commitments.”

“On that comparable, we expect growth to be relatively flat. We expect consistent execution across our core annuity sales motions with strong renewals and continued commitment to our platform as we focus on meeting customers' changing contract needs, which include shorter term, quick time to value contracts in this dynamic environment. Our key focus remains on delivering customer value.”

More Personal Computing declined by (9%) YoY to $13.3 billion and was better than the mid-point of the management guidance for a decline of (16.7%). The PC segment revenue witnessed better than expected results in all businesses. The guidance for the next quarter represents a YoY decline of (5.6%).

Amy Hood said in the earnings call, “Windows OEM revenue decreased 28% year-over-year and Devices revenue decreased 30% and 26% in constant currency, both ahead of expectations. We saw better-than-expected PC demand, as noted earlier, particularly in the commercial segment, which has higher revenue per license, although results continue to be negatively impacted by elevated channel inventory levels.”We saw better-than-expected PC demand, as noted earlier, particularly in the commercial segment, which has higher revenue per license, although results continue to be negatively impacted by elevated channel inventory levels.”

“Windows commercial products and cloud services revenue increased 14% and 18% in constant currency, significantly ahead of expectations, primarily due to the strong renewal execution with higher in-period revenue recognition noted earlier. Search and news advertising revenue ex TAC increased 10% and 13% in constant currency, including 2 points from the Xandr acquisition. Results were driven by higher search volume with share gains again this quarter for our Edge browser globally and Bing in the U.S.”

“And in Gaming, revenue declined 4% and 1% in constant currency, ahead of expectations. Xbox hardware revenue declined 30% and 28% in constant currency on a high prior year comparable that benefited from increased console supply. Xbox content and services revenue increased 3% and 5% in constant currency, driven by better-than-expected monetization in third-party and first-party content and growth in Xbox Game Pass.”

Source: Company IR

Other notable comments from the earnings call:

Amy Hood said, “We will continue to invest in our cloud infrastructure, particularly AI-related spend as we scale with the growing demand, driven by customer transformation. And we expect the resulting revenue to grow over time. As always, we remain committed to aligning cost and revenue growth to deliver disciplined profitability. Therefore, while the scaled CapEx investments will impact COGS growth, we expect FY '24 operating expense growth to remain low.”And we expect the resulting revenue to grow over time. As always, we remain committed to aligning cost and revenue growth to deliver disciplined profitability. Therefore, while the scaled CapEx investments will impact COGS growth, we expect FY '24 operating expense growth to remain low.”

Satya Nadella put more thoughts on optimization and new workloads into an analyst question. “Thanks, Mark for the question. Maybe I'll make three comments. And it's also important, I think to distinguish between what I'd say, macro or absolute performance and relative performance because I think that's perhaps a good way to think about how we manage our business.”

“First is optimizations do continue. In fact, we are focused on it. We incent our people to help our customers with optimization because we believe in the long run that the best way to secure the loyalty and long-term contracts with customers when they know that they can count on a cloud provider like us to help them continuously optimize their workload. That's sort of the fundamental benefit of public cloud, and we are taking every opportunity to prove that out with customers in real time.”help our customers with optimization because we believe in the long run that the best way to secure the loyalty and long-term contracts with customers when they know that they can count on a cloud provider like us to help them continuously optimize their workload. That's sort of the fundamental benefit of public cloud, and we are taking every opportunity to prove that out with customers in real time.”

“The second thing I'd say is, we do have new workloads started because if you think about it, during the pandemic, it was all about new workloads and scaling workloads. But pre pandemic, there was a balance between optimizations and new workloads. So what we're seeing now is the new workloads start in addition to highly intense optimization driven that we have.”“The second thing I'd say is, we do have new workloads started because if you think about it, during the pandemic, it was all about new workloads and scaling workloads. But pre pandemic, there was a balance between optimizations and new workloads. So what we're seeing now is the new workloads start in addition to highly intense optimization driven that we have.”

“The third is perhaps more of a relative statement because of some of the work we've done in AI even in the last couple of quarters, we are now seeing conversations we never had, whether it's coming through you and just OpenAI's API, right? If you think about the consumer tech companies that are all spinning essentially Azure meters, because they have gone to open AI and are using their API. These were not customers of Azure at all.”These were not customers of Azure at all.”

“Second, even Azure OpenAI API customers are all new, and the workload conversations, whether it's B2C conversations in financial services or drug discovery on another side, these are all new workloads that we really were not in the game in the past, whereas we now are. So those are the three comments that I'd make, both in terms of absolute macro, but more importantly, I think, what is our relative market position and how it's being changed.”“Second, even Azure OpenAI API customers are all new, and the workload conversations, whether it's B2C conversations in financial services or drug discovery on another side, these are all new workloads that we really were not in the game in the past, whereas we now are. So those are the three comments that I'd make, both in terms of absolute macro, but more importantly, I think, what is our relative market position and how it's being changed.”

Amy Hood also added, “Mark, maybe the one thing I would add to those comments is, we've been through almost a year where that pivot that Satya talked about from we're starting tons of new workloads, and we'll call that the pandemic time, to this transition post, and we're coming to really the anniversary of that starting. And so to talk to your point, we're continuing to set optimization. But at some point, workloads just can't be optimized much further. And when you start to anniversary that, you do see that it gets a little bit easier in terms of the comps year-over-year. And so you even see that in a little bit of our guidance, some of that impact from a year-over-year basis.”we're continuing to set optimization. But at some point, workloads just can't be optimized much further. And when you start to anniversary that, you do see that it gets a little bit easier in terms of the comps year-over-year. And so you even see that in a little bit of our guidance, some of that impact from a year-over-year basis.”

Wall Street Analysts Notes:

Wedbush Securities analyst Dan Ives said in a research note. "It's clear that in Redmond's enterprise backyard the company is gaining more market share on the cloud front with many enterprises making this transformational shift on the shoulders of Microsoft,"gaining more market share on the cloud front with many enterprises making this transformational shift on the shoulders of Microsoft," He further said, "Cloud growth and the overall outlook for the June quarter was solid and much better than feared given recent noise in the market and will be music to the ears of investors this morning digesting results."Cloud growth and the overall outlook for the June quarter was solid and much better than feared given recent noise in the market and will be music to the ears of investors this morning digesting results."

BMO analyst Keith Bachman upgraded Microsoft (MSFT) shares to outperform. He stated that he now has "higher conviction" that any headwinds to Azure are likely to moderate by the end of the year, while opportunities in artificial intelligence can help the longer-term. "While the stock is not inexpensive, we think the durable growth opportunities warrant a premium valuation."

RBC Capital analyst Rishi Jaluria raised the firm's price target on Microsoft to $350 from $285 and keeps an Outperform rating on the shares. The company's "surprisingly clean" beat-and-raise quarter should help ease some concerns across software, including the narratives around cloud saturation, as AI is set to be the next frontier. Microsoft's commercial business showed more resiliency than expected, headlined by Azure growth hitting the high-end of guidance and Office 365 showing continued resiliency.

UBS analyst Karl Keirstead raised the firm's price target on Microsoft to $300 from $275 and keeps a Neutral rating on the shares. Microsoft's Q3 print was "surprisingly positive," with total constant currency revenue growth of 10% and a material EPS beat. The firm thinks the only concern might be the outlook for FY24 to be an AI investment year and what that means for gross margins and EPS growth.

Conclusion:

The company’s leadership position in the cloud and its perfect customer base of Fortune 500 companies have paid off. Even though Azure is decelerating what is important is that the company is gaining market share. Also, the opportunities in AI are the main highlights in the report, along with the company’s resilience in the Personal Computing Segment.

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