Despite Slowing Growth, the Battle for Artificial Intelligence (AI) Domination Between Google and Microsoft Is Kicking Off in the Cloud

After years of frantic growth, cloud computing adoption has taken a breather over the past year or so. There's little doubt that last year's downturn -- accompanied by the worst stock market performances in over a decade -- was a contributing factor as businesses reined in spending and positioned themselves to ride out the macroeconomic storm.

Things appear to have turned the corner in 2023. Each of the major market indexes has rebounded more than 20% from their respective bottoms, with some investors believing we're at the start of the next bull market.

Given the excitement surrounding artificial intelligence (AI) in latest months, investors wondered about the accelerating adoption of AI and what impact it might have on cloud growth. Rivals Microsoft (MSFT 1.41%) and Alphabet (GOOGL 2.55%) (GOOG 2.71%) both issued their quarterly financial reports after the market close on Tuesday, and it was clear that AI hasn't jump-started cloud infrastructure revenue -- at least not yet.

Image source: Getty Images.

Microsoft helped kick off the current battle for AI supremacy with its $13 billion investment in OpenAI and ChatGPT, as well as integration of generative AI into its Bing search engine. What quickly followed was a wholesale integration of AI tools across its vast software empire -- particularly its Azure Cloud. Given that rapid pivot, investors hoped to see the first green shoots of expanding growth, but that wasn't the case.

For its fiscal 2023 fourth quarter (ended June 30), Microsoft said that Azure and other cloud services grew 26% year over year. Its growth rate has been steadily eroding since Microsoft announced Azure cloud growth of 51% in mid-2021, making this quarter its slowest pace of growth in two years. On the bright side, Microsoft Cloud surpassed $110 billion in annual revenue, with Azure making up 50% of the total for the first time. 

CEO Satya Nadella noted, "We continue to see more cloud migrations, as it remains early when it comes to long-term cloud opportunity." Nadella went on to say that "more than 11,000 organizations" had adopted Azure OpenAI Service.  

Given the complexity of moving to the cloud, there's a lag between when a business makes a decision and the revenue appears on Microsoft's (or any cloud provider's) financial statements. Furthermore, Microsoft only recently announced the availability and pricing of its existing AI products and services, so it may be another quarter or two before AI begins to move the needle on Microsoft's cloud results.

Alphabet was widely derided as being slow off the mark, responding to Microsoft's AI-infused Bing with a not-ready-for-prime-time Bard, but the company has since made up for its initial missteps. At its I/O developer conference in May, the Google parent announced plans to integrate AI across a broad range of products and services. As with Microsoft, investors had hoped to see a boost to Google's Cloud results, but none was forthcoming -- at least not yet.

For the second quarter, Alphabet said Google Cloud generated growth of 28% year over year -- unchanged sequentially -- and enough to retain its title as the fastest growing of the "big three" cloud providers. Like Microsoft, Google's cloud growth has been steadily decelerating since it peaked at 54% in mid-2021, making this quarter its slowest growth rate in two years. Just last quarter, the company announced that Google Cloud had turned a profit for the first time, a trend that continued in Q2.

On the conference call, Sundar Pichai said, "Our new generative AI offerings are expanding their total addressable market and winning new customers," which the company plans to upsell to its installed base of 9 million Google Workspace customers. He went on to point out that 70% of generative AI unicorns are Google Cloud customers and that the number of customers using its generative AI tools has grown more than 15 times between April and June.  

As I pointed out, it will likely be another quarter or two before they begin to see the impact of AI on Google's cloud results.

While this slowing cloud growth might concern Microsoft and Alphabet investors, it's worth putting this into the context of the broader cloud infrastructure growth. Global cloud infrastructure services spending is expected to grow 23% in 2023, down from 29% growth last year and 35% in 2021. 

Azure and Google Cloud are outpacing the overall industry forecast at 26% and 28%, respectively, which suggests they continue to steal market share from cloud infrastructure leader Amazon Web Services. We'll likely have more clarity when Amazon reports its second-quarter results on Aug. 3. 

Finally, the industry outlook likely preceded the current AI gold rush, so overall cloud growth could easily exceed expectations this year. That will be something to watch carefully over the coming quarters.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena has positions in Alphabet, Amazon.com, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon.com, and Microsoft. The Motley Fool has a disclosure policy.

Google Cloud & CareCloud Announce Landmark Collaboration To Bring Generative AI To Outpatient Healthcare Settings

On Thursday, CareCloud, Inc. announced a landmark collaboration with Google Cloud to enable revolutionary generative AI technology and capabilities to benefit small and medium sized healthcare practices and outpatient providers.

Needless to say, Google Cloud is an industry titan and has made significant strides in not only the AI space, but has also achieved compelling progress in its healthcare work. CareCloud is known for its extensive work with small and medium sized healthcare organizations and its significant experience with technology based revenue cycle management, digital health, and provider services. Given its work in the industry for nearly two decades, CareCloud has collected extensive clinical and financial data sets— which now, by harnessing Google Cloud’s generative AI stack and capabilities, can be brought to life and be used in meaningful ways via search and recommendation generation.

Integration of this technology will enable practices that use CareCloud’s services to unlock a new realm of value: “For example, when a patient comes into a clinic using CareCloud, the generative AI-based solution will surface relevant information and assist clinicians and doctors as they recommend a plan of care, including medications, lab orders, diagnoses, and procedures based on their previous clinical history and current symptoms. Based on the recommended diagnoses, patient insurance, and other information, the solution will be able to show the clinic and patient what costs would be paid by the insurance and what amount would be owed by the patient.”

Aashima Gupta, Global Director of Healthcare Strategy and Solutions at Google Cloud, explains how the technology provides unique value: “Organizations need more than just large language models (LLMs). There is a huge concern in the healthcare setting about hallucinations [which, per Google Cloud, refers to “when a generative AI model outputs nonsense or invented information in response to a prompt”] The technology uses retrieval augmented generation (RAG) combined with LLMs, which powers and enhances their enterprise search functions to the next level […] this is where the use cases become more promising and the results become more grounded and fact based.”

Enterprise Search (via Gen App Builder) is Google Cloud’s revolutionary technology which allows organizations to quickly build generative AI powered search engines to make use of their structured or unstructured data sets. Just last month, Google Cloud announced a groundbreaking partnership to bring Enterprise Search to renowned healthcare organization, Mayo Clinic.

BARCELONA, SPAIN - MARCH 2023: People walk in front of the Google Cloud's booth during the Mobile ... [+] World Congress in Barcelona, Spain. (Photo by Cesc Maymo/Getty Images)

Hadi Chaudhry, CEO and President of CareCloud, is enthusiastic about the collaboration: “The vision for all of this technology is to use it to better the clinical experience for the patient and the physicians; they can leverage Google Cloud’s generative AI to take [our extensive data sets] further [and] use this data in a meaningful way…together, using Google’s technology, the right models can be trained for useful purposes.”

Adeel Sarwar, CTO of CareCloud, described potential use cases for the technology, starting from improving the pre-visit patient check-in process with smarter intake questions, to the system providing tailored recommendations and evidence-based guidelines curated to the patient’s need during the clinic visit, and finally, concluding with the system providing billing and financial information post-visit.

Importantly, Google Cloud has made it a top priority to develop its capabilities with strict adherence to Responsible AI guidelines: “Since 2018, Google’s AI Principles have served as a living constitution, keeping us motivated by a common purpose. Their center of excellence, the Responsible Innovation team, guides how they put these principles to work company-wide, and informs Google Cloud’s approach to building advanced technologies, conducting research, and drafting their policies.” Congruently, the company has placed meaningful guardrails to prioritize privacy, prevent bias, and enforce ethical development.

Overall, this venture is an incredible boon to ambulatory healthcare practices. While the majority of technology giants have thus far focused on providing AI capabilities primarily to large organizations, Google Cloud and CareCloud’s work in providing access to an often overlooked yet critically important sector of the healthcare infrastructure is a key step in improving healthcare outcomes for generations to come. Indeed, a commitment to continued innovation and meaningful collaborations such as this, premised by a steadfast goal of improving quality of care, display great promise for the future of healthcare.

Google stock jumped 10% this week, fueled by cloud, ads and hope in A.I.

Google CEO Sundar Pichai speaks onstage during the annual Google I/O developers conference in Mountain View, California, May 8, 2018.

Stephen Lam | Reuters

Shares of Alphabet's stock jumped 10% this week after the company reported second quarter earnings that showed growth despite a tough ad market.

Share price for the Google parent company reached $132.58 as of Friday's market close, representing its highest close price in more than a year.

Google has faced a lot of noise this year around the health of its core search business, due to a slumping digital ad market and the longer-term potential for artificial intelligence chatbots to take traffic.

But, its second quarter earnings report Tuesday, the company showed it has any numbers of ways to succeed despite those very real challenges. Among growth, revenue rose 7% to $74.6 billion from $69.7 billion in the year-earlier period.

Online advertising, which has been a difficult market for the past year, remains slow because of economic concerns and corporate cost cutting. Google's ad revenue only increased 3.3% from a year earlier, but that's an improvement from the first quarter, when ad revenue fell. And it came after Snap's second-quarter report issued a disappointing forecast, sending the stock down almost 20%.

Google's YouTube and Cloud units also showed revenue growth despite competition.

"Revenue growth outpaced expense growth for the first time in a while," wrote Bernstein analysts in a note following the earnings report.

Google's stock jump also came despite Alphabet chief finance officer Ruth Porat, who has overseen companywide cost-cutting, announced she's leaving that role after eight years to assume the newly created position of president and chief investment officer.

Search revenue, which makes up the majority of Google's ad business, also saw steady growth during the quarter. That was a relief to investors, some of whom have grown concerned that traditional search users will be moving to generative AI chatbots from OpenAI and Microsoft, the startup's main investor, for their online queries.

"We believe this bodes well for the broader online advertising environment," Citi analysts wrote in a note about Google's earnings. "That said, they do not believe this is a 'rising-tide' environment, rather they favor those platforms that have invested in newer products and services."