AI's stardust brings in the money

There has been some disappointment that cloud revenues reported by the major players that provide digital services and storage have fallen a little short of expectations. Microsoft, Alphabet and Amazon, the big three in the cloud, were all on the light side of heady market forecasts. Looking at the growth rates, we are talking of them coming down from the stratosphere to something still well above the dull earthbound growth rates of many other businesses.

Microsoft’s first-quarter results this week showed a gain of 26% in net income. It was in no doubt what was powering their growth. It stated: “We are rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers. With co-pilots we are making the age of artificial intelligence (AI) real for people and businesses everywhere.”

Microsoft burst AI onto the world with its launch of Chat GPT and its investment in the company. The star dust we saw earlier this year in AI certainly has worked so far for them in helping their overall net income, cash and revenue growth.

Alphabet’s Google also produced third-quarter results. Net income was up an impressive 41% over the same quarter last year, with revenues up 11%. Cloud revenues were up 22%. It too wanted to remind us of the role of AI. It said AI was driving innovation across search, YouTube, the cloud, its Pixel devices, and more. “We are continuing to focus on making AI more helpful for everyone, there’s existing progress and more to come”.

Amazon Web Services remains a crucial player in this area, with margins rising to 30%. The growth rate at 12% was lower than many wanted, but the company reported more clients signing up as the reporting period drew to an end. Amazon tells us it has entered a strategic collaboration to advance generative AI with Anthropic.

When Nvidia last reported quarterly results to the end of July, it delighted the market. It doubled revenue and revealed 854% growth in earnings per share on the previous year. It remains one of the purest plays on AI and is in a good position to turn opportunity into solid cash and profit. It will need to, as the share price now implies a lot of success following a huge rise. It supplies the specialist chips that are needed for the banks of computers to deliver the AI services.

Cloud essential for AI

AI expansion goes hand in hand with expansion of cloud computing. Alphabet, Microsoft and Amazon between them account for around two thirds of the cloud services market. They provide much of the property and technical installations to offer companies access to data storage and processing away from their own offices, run by data professionals. This has been fast growing, with the likelihood of more to come as many businesses adopt more AI assistance and require more data capacity to handle it.

It is likely AI will grow quickly, as it will be seen by employees as a good tool to make their working lives easier as well as being seen by managers as way to enhance productivity. It is more likely to be introduced gradually, with the productivity gains in many cases affecting future recruitment levels rather than leading directly to redundancies. There will also be a wish to harness it to enhance quality and to expand business activities by sharpening customer service and sales and marketing activities.

The phrase the co-pilot implies support and assistance rather than some digital demon out to take your job. Many employees will themselves be interested in whether a digital assistant can retrieve data and information, help process it and talk to computers in ways which offer real help and take some of the drudgery out of working on a computer.

The three market leaders are using these services to get access to a wide range of business partners, peering into the details of how they run their companies and offering ways to improve their record keeping, data handling and management information. They have different charging models. Google relies more on advertising revenues whilst Microsoft charges clients for software packages and use.

Monetising new technology

AI services are often offered initially for free, but then enhanced packages and better services are offered for a subscription or for user charges based on page use or time. They will become a built-in business cost, part of the revenue expenses of computing that a typical business now has an essential feature of its cost budgets. Individuals currently benefit from free use of basic services, but many of these may be persuaded to buy an enhanced service. Students, for example, looking for well researched information for their assignments may well pay for the better service in search of superior and different answers.

The office has been through one revolution already this decade. Covid lockdowns fast forwarded the idea of remote working and required businesses to install on line meeting and communication technology. Employees had to be furnished with computers for their homes and good links into their offices. Now the AI revolution will build on that allowing changes to job specifications and enhancements to the way people carry them out. Many staff members will be able to call on a digital assistant to carry out tasks and prompt their responses. All of this is good news for the futures of the big three AI giants.

This year has seen stock markets led by the great performance of the magnificent seven, all US based technology companies. Within that group, the three AI and cloud companies are battling it out to see who can advance it furthest and fastest and who can take more of the market. The market has backtracked a bit with the publication of these latest figures, reflecting the big climbs in prices we have already seen and questions about the sustainable growth rate from here.

These remain stocks that are in the clouds, where people are now arguing whether high flying Cirrus clouds have become lower flying cumulus or stratus. By any observation the growth rates are still impressive for such large groups. AI developments have much further to run, though there will be share retreats from time to time as people ask if the prices are expecting too much and as they wait for the growth to catch up with the share price.