Artificial Intelligence Fuels Growth in Cloud Computing: A Closer Look at Top Players
As artificial intelligence (AI) continues to evolve, cloud computing has emerged as a major benefactor. Companies are eagerly customizing AI models and applications to suit their operations, turning to leading cloud providers for support. Below, we examine the three top contenders in this lucrative market.
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1. Amazon
Amazon (NASDAQ: AMZN) pioneered the cloud computing field in 2006 with the launch of Amazon Web Services (AWS). By providing essential server infrastructure, the platform helps businesses quickly establish their e-commerce operations. Today, AWS commands roughly 31% of the cloud computing market, making it Amazon’s most profitable segment.
Last quarter, AWS showcased impressive growth with a 19% surge in revenues, hitting $27.5 billion. Operating income also soared almost 49%, reaching $10.4 billion. Notably, AI-driven revenue experienced triple-digit growth.
Amazon’s Bedrock and SageMaker solutions have gained significant traction. Bedrock gives users access to foundational AI models, while SageMaker assists in building, training, and deploying custom AI applications. The company has also developed proprietary AI chips to enhance model training and inference.
Beyond cloud computing, Amazon is a global leader in e-commerce and logistics. Its AI advancements are streamlining operations across this extensive business.
The stock trades at a forward price-to-earnings (P/E) ratio of just under 29, a discount compared to its historical trading patterns. Historically, Amazon has been willing to invest heavily in growth, and this trend is likely to continue as it ventures further into AI and cloud computing.
Image source: Getty Images.
2. Microsoft
Microsoft (NASDAQ: MSFT) quickly recognized the potential of generative AI and forged a prominent collaboration with OpenAI. As a result, its Azure platform has thrived, securing a 20% share of the cloud computing market.
In its latest quarterly results (fiscal Q1), Azure reported a 33% revenue increase. Microsoft noted a doubling in Azure OpenAI usage within six months, driven by customers creating custom AI agents and applications. As more customer applications transitioned from testing to production, Azure’s data handling services also saw increased demand.
Despite capacity constraints that limited revenue growth, Microsoft predicts a significant acceleration in the second half of its fiscal year as new capacity goes live. The company plans to invest around $80 billion to build new AI data centers by 2025.
In addition to cloud services, Microsoft excels in workplace productivity with products like Word, Excel, and Outlook, along with its Windows operating systems. The possibilities of its AI assistant Copilots, offered as a $30 monthly add-on in Microsoft 365, present additional opportunities for improving workplace efficiency.
The stock currently trades at a forward P/E ratio of just under 32, a reasonable assessment given the forthcoming opportunities.
3. Alphabet
Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) may have the smallest cloud division among the top three, with a 12% market share, but its growth rate is the fastest. Last quarter, Google Cloud’s revenue surged 35% to $11.4 billion, marking its first step into significant profitability, with operating income jumping from $266 million a year ago to $1.95 billion.
Alphabet attributes its cloud growth largely to customers utilizing its AI platform for personalized model creation, leveraging tools like Gemini and third-party foundational models. They reported a 14-fold increase in Gemini API requests during the last six months. Further, they are experiencing increased traction with AI applications, including their BigQuery data platform and AI-driven cybersecurity solutions.
By integrating customized tensor processing units (TPUs) alongside graphic processing units (GPUs), Alphabet has managed to cut costs and reduce processing times significantly. On its latest earnings call, it noted that one client decreased their costs by 72% while improving processing efficiency by 50%.
Beyond cloud services, Alphabet leads in digital advertising with its Google search engine and YouTube, the top video platform globally. The company also pioneers advancements in various domains, from autonomous vehicles (Waymo) to AI video generation (Veo 2) and quantum computing (Willow chip).
The stock is currently priced attractively, trading at a forward P/E of just under 18.7. With ample growth opportunities ahead, this represents a possible bargain.
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Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is also a board member. Geoffrey Seiler holds positions in Alphabet. The Motley Fool recommends and holds positions in Alphabet, Amazon, and Microsoft, and has disclosed various options related to Microsoft.
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