LDN - Business

Big Tech looks to turn the corner on cloud as AI focus stays strong

[July 24, 2023] By Yuvraj Malik and Aditya Soni

(Reuters) - U.S. tech giants could signal an end to the nearly year-long slowdown in their cloud businesses as signs of economic resilience encourage clients to boost technology spending, while a pickup in digital ads will also aid profits.

Microsoft, Google-owner Alphabet, Amazon.com and Meta Platforms — companies that are together valued at over $6 trillion — are set to report earnings this week and the next, in what will be a test for their hefty valuations and the broader market rally they have driven thanks to optimism over artificial intelligence.

"We're really only looking for metrics that point to ramping user traction for AI-based offerings, with the idea being that they will generate more meaningful revenue in the medium-term," Canaccord Genuity analyst Kingsley Crane said.

The four companies have this year aggressively integrated AI into their products on hopes that it would drive the industry's next growth cycle, but those efforts will take time to pay off.

For Amazon, Microsoft and Alphabet — the three biggest players in the cloud market — the April-June quarter is expected to mark another period of dismal growth in the business that has long been a cash cow.

Both Amazon and Alphabet will likely report their lowest-ever growth for the cloud computing business at 9.8% and 24.4%, respectively, according to analysts polled by Refinitiv. Meanwhile Microsoft Intelligent Cloud, home to Azure, is expected to grow at 13.7%, the slowest rate since 2017.

However, several analysts believe the trend is about to change.

"While the macro continues to be soft, it is not getting materially worse and companies are figuring out how to operate in this," RBC Capital Markets analyst Rishi Jaluria said.

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A Microsoft logo is seen in Los Angeles, California U.S. November 7, 2017. REUTERS/Lucy Nicholson/File Photo

The current quarter will also have easier year-ago comparisons as the cloud slowdown started in the September quarter of 2022, Jaluria added.

A recent survey by RBC Capital of more than 150 enterprise technology buyers showed that over four-fifth of them were funding projects related to generative AI and they broadly expect IT spending to increase this year over 2022.

For Facebook-owner Meta Platforms, revenue is expected to grow at its fastest pace in six quarters thanks to a pickup in the digital advertising market as consumer spending stays strong.

"If the digital ad space is like riding a roller coaster, we are just about done with the boring/tough part, slowly climbing to the top chain link by chain link," Bernstein analysts said.

The digital ad market recovery will also aid Alphabet, whose Google Search has so far avoided any meaningful market share loss to Microsoft's AI-powered Bing.

Alphabet is expected to report 4.5% revenue growth in the April-June period, its best in three quarters.

"Google Search has seemingly shifted from market share risk to monetization risk, but with search share seemingly healthy, Google may have less urgency to integrate LLM (large-language model) results into commercial queries," analysts at BofA Global Research said.

Microsoft and Alphabet will report quarterly results on July 25, Meta on July 26 and Amazon on Aug. 3.

(Reporting by Yuvraj Malik and Aditya Soni in Bengaluru; Editing by Shounak Dasgupta)

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