As Cloud Computing Growth Slows, Tech Titans Turn To AI For A Boost

Cloud computing giants saw their revenue growth slow down again in the first-quarter. Microsoft (MSFT), Alphabet, the parent company of Google (GOOGL), and other cloud computing giants are now focusing on new services that tie in with artificial intelligence software.

Technology giants say that the slowdown in cloud computing growth is due to companies rethinking their cloud services to make them more efficient, rather than racking up huge bills.

Customers can rent cloud servers and storage space as they need it in the "public" market. Cloud giants offer processing power and storage for sale by the hour, day, week, or month.

Mehdi Hosseini, Susquehanna's analyst, said that there was a shift in IT spending. Customers are becoming more selective in their cloud investments. After a rush to migrate to the cloud by enterprises, they now find that it is more costly than expected. They often lose control over managing the performance of critical applications.

The tech giants are now focusing on how to get customers to spend even more money on cloud services. Artificial intelligence software can help. Cloud customers could use it to develop and innovate new products.

In a recent UBS note about Amazon.com's (AMZN), the analyst Lloyd Walmsley stated that "AI-centric investments in workloads could drive a significant increase in cloud consumption." Amazon.com is also dealing with a slowing growth of cloud services.

How Cloud Computing is Slowing down

Check out the earnings of some cloud giants.

Microsoft announced on Tuesday that Azure cloud computing revenue for its third fiscal quarter grew 31%, to $14.52 Billion. This is a slowdown from the 46% growth of the previous period. Microsoft also forecasted cloud growth between 26% and 27% in the June quarter. This is slightly lower than the 28% estimate.

Microsoft's forecast of 26%-27% Azure cloud growth for the quarter ending June includes 1% revenue from new artificial-intelligence services. Microsoft is also the first to break out AI revenue from the cloud business.

Microsoft reported that it had 2,500 OpenAI Azure customers as of the third quarter of this year, a 10 fold increase from the previous quarter.

Sterling Auty, a MoffettNathanson Analyst, said recently: "This is proof Microsoft is becoming Intel Inside of AI. This can provide a great deal of leverage."

Microsoft is the largest investor in OpenAI. In November, it launched ChatGPT Internet Search Tools. ChatGPT also sparked an interest in generative AI technology. They can create text, graphics, videos, and computer code all on their own.

Google's cloud computing revenue grew by 28% in the quarter ending March, to $7.45 Billion, just missing expectations of $7.46 Billion. Google's cloud computing business saw revenue grow by 44% in comparison to the previous year.

Amazon's earnings will be released on Thursday. Amazon Web Services (its cloud business) reported a 37% increase in revenue for the first quarter 2022. AWS revenue growth is expected to be around 15% in the March quarter 2023.

Cloud Computing: AI Battleground

AI technology is based on computer algorithms. Software programs are designed to mimic human abilities to learn, to interpret patterns, and to make predictions. AI can also generate content.

Evercore ISI analyst Mark Mahaney said in a recent note that generative AI workloads may drive cloud computing adoption in the coming 12 to 18 month.

Mahaney stated that AI could help unlock new cloud workflows, and help accelerate cloud demand. As IT spend on innovation projects increases and resumes, "AI" will drive more revenue to the cloud. Cloud customers will use generative AI in order to create new experiences for their customers, which leads to greater revenue opportunities.

Rob Oliver, Baird's analyst, has a similar opinion. In a note, he stated that "the emergence and rapid adoption of generative AI creates a new and intense battleground for the leading cloud service platforms."

The technology of generative AI is also finding rapid applications in advertising, marketing, drug development and legal contracts. It can also be used for video games, customer service, digital art, video gaming and customer support.

Microsoft's Azure cloud service uses OpenAI's AI generative technology. It has been available since January. BMO Capital Markets reported that Azure customer CarMax uses Azure OpenAI for creating text summaries on its car research pages.

In order to increase cloud AI adoption in corporate environments, customers must give their data over to Microsoft to create AI models. This was stated by BMO analyst Keith Bachman.

Amazon's New AI Cloud Service

He said: "We believe that more organizations are going to undertake or expand their AI workflows as a consequence of advances in generative AI. However, the revenue impact will likely be more long-term than near-term for Azure AWS GCP."

By consuming internet content, NLP tools can also train AI models that generate new language. NLP tools create answers to questions by analyzing internet data. OpenAI is also part of the wave of NLP startup companies. These include AI21 Labs and Anthropic.

AWS announced recently a new cloud-based service which offers tools from AI21 Labs and Anthropic, as well as Stability AI. Amazon offers its own foundational model. Google's cloud computing division has partnered up with Cohere in order to offer AI-related services. Google has also developed its own NLP software to train AI models.