AI adoption by Big Tech giants to restart cloud growth
Introduction
Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN) are increasingly focusing on AI to boost cloud growth, which has slowed down since 2022 due to economic uncertainty. However, AI’s increasing popularity is likely to improve the sector’s growth, making these firms hold on to these stocks through 2023 as they recover from last year’s losses.
The Scope of Cloud Developments
These cloud developments go beyond Amazon, Alphabet, and Microsoft, touching on other names in the portfolio, such as Nvidia (NVDA), whose chips are essential for the accelerated computing power required to run AI models. AI adoption benefits Amazon’s Amazon Web Services (AWS) unit, making it good news for Alphabet’s Google Cloud and Microsoft’s Azure business.
The Impact of AI on Cloud Growth
As macroeconomic challenges have constrained spending for enterprises, this has translated into lower revenue generation for all three cloud-computing units. In the most recent quarter, AWS revenue grew 16% YoY to $21.35 billion, compared with 37% YoY in the year-ago period. On the other hand, Alphabet’s Google Cloud sales grew 28% YoY to $7.45 billion in the first quarter of 2023, compared with 44% growth in the first quarter of 2022. As for Microsoft’s Azure and other cloud services revenue, it came in at 27% in its most-recent quarter, down from 46% YoY in the year-ago period.
Navigating the AI Hype Cycle
With a lot of buzz around AI, investors must navigate this hype cycle carefully. This is because we have witnessed the crypto craze and the metaverse mania that have come back to earth. Nevertheless, AI adoption carries significant financial implications for cloud companies that enable other companies to harness AI’s benefits. While Nvidia’s indispensable chips make it the favorite way to ride the AI wave, the cloud divisions of Amazon, Alphabet, and Microsoft will, ultimately, see renewed growth in the coming quarters.
Google’s Enterprise Search
To manage large amounts of data in the health-care industry, Google is testing Enterprise Search, an AI-powered service, to benefit companies. It is expected to help companies create custom chatbots and search applications by merging their proprietary data with Google’s search functions, to ultimately help analyze heaps of data.
Microsoft’s Azure Government Cloud
Azure Government Cloud allows U.S. government customers to tap into OpenAI’s benefits using Microsoft’s popular AI tool, ChatGPT. Azure Government customers can access three of OpenAI’s large language models – GPT-4, GPT-3, and Embeddings – to improve efficiency, enhance productivity, and unlock new insights from their data. This increased availability of OpenAI’s models is expected to increase efficiency and further productivity by unlocking new insights for the government agencies that use it.
Amazon’s Cloud Growth
As per analysts from Piper Sandler, AWS is nearing a revenue-growth trough, which means that its growth rate should bottom out soon. They expect Amazon’s cloud growth to reaccelerate following Nvidia’s outstanding Q1 2024 earnings that revealed massive demand for its data-center chips that power generative AI models.
Conclusion
Even though economic uncertainty slowed cloud growth in 2022, AI adoption by Big Tech giants presents a significant opportunity for growth. Investing in Nvidia or Amazon, Alphabet, and Microsoft’s cloud divisions is bound to see renewed growth in the coming quarters. However, investors must navigate the AI hype cycle carefully and be patient to see it through.
Disclosure
Jim Cramer’s charitable trust is long on MSFT, NVDA, AMZN, and GOOGL. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade.