With Wall Street intensely focused on cloud computing this week, Google emerged as a frontrunner in growth, signaling to investors that the tech giant is successfully capitalizing on its advancements in artificial intelligence. In the third quarter, Google’s cloud business grew 35% year-over-year to $11.35 billion, up from 29% growth the previous quarter.
Meanwhile, Amazon Web Services, still the dominant player in the market, reported a 19% growth to $27.45 billion, making it over twice the size of Google Cloud but expanding at roughly half the rate. Second-place Microsoft announced that its Azure and other cloud services revenues increased by 33% compared to a year prior.
This week, five of the six trillion-dollar tech companies released their results, with AI chipmaker Nvidia standing out as an exception. Amazon, Alphabet, and Microsoft consistently report their earnings around the same time, offering investors a clear view of the competitive landscape in the cloud sector.
Google’s cloud business, which includes infrastructure as well as software subscriptions, grew 35% year over year in the third quarter to $11.35 billion, accelerating from 29% in the prior period.
Amazon Web Services, which remains the market leader, grew 19% to $27.45 billion, meaning it’s more than twice the size of Google Cloud but expanding about half as quickly. Second-place Microsoft said revenue from Azure and other cloud services grew 33% from a year earlier.
Five of the six trillion-dollar tech companies reported results this week, with AI chipmaker Nvidia as the outlier. Amazon, Alphabet and Microsoft always report around the same time, giving investors a snapshot of how the cloud wars are playing out.
Analysts at Argus Research, who advocate for buying the stock, noted in their October 31 report that while Alphabet has frequently faced criticism for being overly reliant on digital advertising, the impressive growth of Google Cloud is beginning to diversify the company’s revenue streams. Previously, Google’s cloud division was a financial drain, but that scenario has changed.
In the third quarter, Google reported a remarkable 17% operating margin for its cloud business, marking its first profitable year. Describing this achievement as a significant positive surprise, Melissa Otto, head of technology, media, and telecommunications sector research at Visible Alpha, commented on CNBC this week. However, she expressed uncertainty about whether the company can maintain this level of profitability moving forward.
For a long time, cloud was a money sink for Google, but that’s no longer the case.
Google reported a 17% cloud operating margin in the third quarter, after first turning a profit last year. It was “a real beat to expectations there,” Melissa Otto, head of technology, media and telecommunications sector research at Visible Alpha, said on CNBC this week. She said she isn’t sure if the company can sustain that level of profitability.
In contrast to many other companies, Amazon has heavily relied on AWS to drive a significant portion of its profits. In the third quarter, AWS boasted an impressive operating margin of 38%, a figure that Bernstein analysts deemed “whopping.”
The company has been judicious with its hiring practices and has phased out less popular AWS services. Additionally, Amazon recently extended the lifespan of its servers from five years to six, a strategic adjustment that enhanced its operating margin by 200 basis points, or 2 percentage points.
This week, Microsoft offered investors more precise insights into its Azure public cloud performance. The reported growth in Azure revenue now includes contributions from mobility and security services, as well as Power BI data analytics software.
As the primary investor in OpenAI, the creator of ChatGPT, Microsoft is experiencing substantial gains from AI services. “Demand continues to exceed our capacity,” stated Amy Hood, Microsoft’s CFO, during the company’s earnings call. Although growth for Azure is expected to moderate slightly in the current quarter, Hood expressed optimism, forecasting a rebound in the first half of 2025 as their capital investments expand AI capacity to meet the surging demand.
AWS’ operating margin for the third quarter was 38%, which analysts at Bernstein described as a “whopping” number. Executives have been careful with hiring and have discontinued less popular AWS services. Also, at the beginning of 2024, Amazon extended the useful life of its servers from five years to six, a change that boosted the operating margin by 200 basis points, or 2 percentage points.
Microsoft this week started giving investors more accurate readings of its Azure public cloud. When the company reported Azure revenue growth, the number would include sales of mobility and security services and Power BI data analytics software. Microsoft, the lead investor in ChatGPT creator OpenAI, is getting a hefty boost from AI services.
“Demand continues to be higher than our available capacity,” Amy Hood, Microsoft’s finance chief, said on the company’s earnings call.
While Azure growth in the current quarter will moderate a bit, Hood said it should pick up in the first half of 2025 “as our capital investments create an increase in available AI capacity to serve more of the growing demand.”
Amazon is experiencing a similar trend in the tech landscape. During the company’s earnings call, CEO Andy Jassy observed, “Virtually everyone today is facing a shortfall in capacity compared to demand, particularly in the chip sector where companies are eager for more supply.”
To mitigate this challenge, Amazon partially depends on its proprietary processors alongside Nvidia’s powerful graphics processing units (GPUs). Jassy mentioned that clients are increasingly interested in Trainium 2, Amazon’s second-generation chip designed for model training. “We’ve reached out to our manufacturing partners multiple times to ramp up production beyond our initial expectations,” he stated.
Meanwhile, Google is advancing its sixth generation of custom tensor processing units dedicated to AI. CEO Sundar Pichai expressed his enthusiasm for the future during a discussion with the TPU team, saying, “I couldn’t be more excited about our forward-looking roadmap, which not only helps us with future planning but also enables us to create a more optimized architecture.”
A year ago, Microsoft unveiled its AI chip, Maia, in the cloud. While the company is now utilizing Maia chips to enhance its services, they remain unavailable to external customers, as confirmed by a spokesperson. Analysts at DA Davidson noted this week that they perceive Microsoft’s competition with Amazon and Google as a formidable challenge, maintaining a neutral outlook on the company’s prospects.
Meanwhile, Oracle, which typically ranks fourth among U.S. cloud infrastructure providers, is set to announce its quarterly results in December. In its previous report, Oracle revealed a significant 45% increase in cloud infrastructure revenue, reaching $2.2 billion, up from 42% growth in the preceding quarter.
Recently, Oracle forged partnerships with its three larger cloud competitors to make its databases accessible through their platforms. Chairman Larry Ellison expressed optimism during the last earnings call, stating that this strategic move “will turbocharge the growth of our database business for years to come.”
“I think pretty much everyone today has less capacity than they have demand for, and it’s really primarily chips that are the area where companies could use more supply,” Amazon CEO Andy Jassy said on his company’s earnings call.
To help ease the burden, Amazon relies to a degree on its own processors, in addition to Nvidia’s graphics processing units (GPUs). Jassy said clients are showing interest in Trainium 2, the company’s second-generation chip for training models.
“We’ve gone back to our manufacturing partners multiple times to produce much more than we’d originally planned,” he said.
Google is now on the sixth generation of its own custom tensor processing units for AI. CEO Sundar Pichai told analysts that he’d been spending time with the TPU team.
“I couldn’t be more excited at the forward-looking roadmap, but all of it allows us to both plan ahead in the future and really drive an optimized architecture for it,” he said.
Microsoft introduced its own AI chip in the cloud, Maia, a year ago. The company has started to use Maia chips to power its own services, but it hasn’t yet made it available for customers to rent out, a spokesperson said.
Analysts at DA Davidson said in a note this week that they don’t see this as a battle Microsoft can win going up against Amazon and Google. They have a neutral rating on Microsoft.
Oracle, which generally ranks fourth among U.S. cloud infrastructure companies, is expected to report quarterly results in December. In its last report, Oracle said cloud infrastructure revenue jumped 45% to $2.2 billion, up from 42% growth in the prior quarter.
Oracle recently partnered with its three bigger cloud rivals to make its databases available on their services, a move that Chairman Larry Ellison said on the last earnings calls, “will turbocharge the growth of our database business for years to come.”
Source: CNBC