Microsoft Corp. and Alphabet Inc. released their latest financial reports on Tuesday, showcasing mostly positive results. However, the response from investors highlighted Wall Street's current obsession with artificial intelligence (AI).

Microsoft's Strong Performance and Azure's Growth

Following the report, Microsoft's shares rose by 4% in after-hours trading. The highlight of the company's performance was the remarkable 28% constant-currency growth in its Azure cloud-computing business. This exceeded both the company's own forecast and the average projection of 25.6% growth anticipated by analysts. Although Microsoft acknowledges the challenges in customer spending optimization, it is capitalizing on the AI-driven momentum in the cloud industry.

The Rise of AI in Cloud Businesses

Many companies aiming to enhance their AI capabilities are turning to additional cloud services to provide AI solutions for their customers. This approach allows them to minimize internal development efforts. Furthermore, the demand for AI applications, such as chatbots and report-writing tools, is necessitating increased computing power. Both Microsoft's Azure and Google Cloud are responding to this need by offering new software applications.

Azure's Growing Importance and New AI Projects

Satya Nadella, Microsoft's Chief Executive, emphasized AI as a "unique and different" factor contributing to Azure's success. He stated that Azure is witnessing an influx of new project starts that primarily revolve around AI initiatives. Moreover, Microsoft's strategic investment in OpenAI, the creator of ChatGPT, has led to the introduction of Azure OpenAI services. More than 18,000 organizations have already embraced this offering, attracting new customers to Azure.

Outlook for Azure's Future Growth

Amy Hood, Microsoft's Chief Financial Officer, projected that Azure revenue growth will continue to flourish, estimated at around 26% in constant currency for the fiscal second quarter. This growth will be driven by emerging workload trends and the increasing contributions from AI.

In summary, both Microsoft and Alphabet delivered impressive results; however, investor response showcased Wall Street's intense focus on AI. Microsoft's Azure outperformed expectations with significant growth, thanks to its favorable position in the cloud industry and the extensive adoption of AI projects. Looking ahead, Azure's revenue growth is expected to continue thriving, fueled by emerging workload trends and AI-driven advancements.

Alphabet's Google Cloud Faces Slowest Quarterly Growth

Investors are showing less confidence in Alphabet's Google Cloud business, as the segment experienced its slowest quarterly growth since it was first reported separately in 2019. The cloud revenue amounted to $8.4 billion, growing by 22%, which fell $250 million short of Wall Street's consensus estimates. While the company's advertising business had a strong performance, this overshadowed the underwhelming results from the cloud division.

When asked about the deceleration in cloud revenue growth, Alphabet CEO Sundar Pichai mentioned that customers are being cautious with their IT budgets and choosing where to invest. He explained that customers have started optimizing their spend, and Alphabet has responded by offering assistance, especially considering the other challenges faced by these customers.

Despite seeing "a lot of interest in AI," it is uncertain whether this will significantly impact Alphabet's financial performance at present. Colin Sebastian, an analyst at Baird, noted that Google Cloud missed revenue expectations due to slower growth. According to Insider Intelligence's senior analyst Max Willens, Google Cloud is facing tough competition and has not yet received enough benefits from AI startups to satisfy investors.

Wall Street is expecting AI to drive better growth rates and counterbalance sluggish macroeconomic trends. Nvidia Corp., in particular, is projected to be a major contributor to earnings growth in the IT sector, thanks to the increasing demand for its AI hardware. Companies that lack a compelling AI story may continue to lose favor with investors in the current economic climate.

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