AI is everything! Microsoft and Google release their earnings reports on the same day, and the market's attitude is clear.

The AI wave that has been driving the rise of the US stock market this year is facing a major test in the third quarter.

The two tech giants, Google and Microsoft, who handed in their papers overnight, both performed well, but their stock price trends were completely opposite: Google's stock price plummeted 6% after hours, while Microsoft's rose 4%.

The reason behind this is simple - Google's monetization of AI is slower than Microsoft's.

Google Cloud can't compete with Azure

In the third quarter, Alphabet, the parent company of Google, reported total revenue of $76.69 billion, a year-on-year increase of 11%, higher than the market's expected $75.8 billion. Adjusted earnings per share were $1.55, a 46% increase from the same period last year's $1.06, and also higher than the expected $1.45.

However, its cloud computing business growth fell short of Wall Street's expectations. Google Cloud's revenue in the quarter grew by 22.5% to $8.41 billion, lower than Wall Street's expected $8.62 billion, marking the slowest growth in eleven quarters.

In the same period last year, Google Cloud's revenue grew by 37.6% year-on-year, and by 32% in the fourth quarter. In the first and second quarters of this year, it grew by 28% each.

In comparison, Microsoft's performance in the third quarter (FY24Q1) was equally impressive, with total revenue of $56.5 billion, a year-on-year increase of 13%, and the quarterly growth rate exceeded 10% for the first time since the third quarter of last year, 3.6% higher than analysts' expectations of $54.54 billion. Net profit for the quarter was $22.3 billion, a 27% increase year-on-year.

More importantly, Microsoft's cloud business revenue did not slow down as expected by the market, but maintained double-digit growth momentum.

The "Intelligent Cloud" business, including Azure, GitHub, server products, enterprise, and cloud services, generated $24.3 billion in revenue in the third quarter, a year-on-year increase of 19%, higher than analysts' expectations of $23.61 billion.

Among them, Azure and other cloud services saw a 29% revenue growth in the third quarter, although it did not reach the peak of 31% in the first quarter, it did not continue to slow down to 27% like in the second quarter, which was higher than analysts' expectations of 26%. Server products and cloud services revenue grew by 21%, accelerating from the 17% growth rate in the second quarter.

The stock price performance of the two tech giants, who released their financial reports on the same day, was completely opposite due to the difference in the growth rate of cloud computing, highlighting the market's attention to the AI field.

Awakening the "Wolf Culture" Google is catching up

Google's parent company CFO Ruth Porat stated in a conference call on Tuesday that the growth of the cloud computing business in the third quarter was due to "customer optimization work," but she did not provide detailed explanations.

Some analysts believe that although Google's quarterly profits and revenues exceeded expectations, the relatively weak performance of Google Cloud has disappointed investors, and it now seems to be falling behind Azure and AWS.

However, while Microsoft Azure is temporarily leading with its relationship with OpenAI, Google is also catching up quickly.

Google's capital expenditure in the third quarter was $8.06 billion, with the majority being invested in technology infrastructure. Porat stated that servers are the largest component, followed by data centers, and the company's investment in artificial intelligence computing has significantly increased.

Google laid off more than 12,000 employees worldwide at the beginning of this year, accounting for 6% of its total workforce, while promoting a "wolf culture" within its AI team to overturn the company's previous overly cautious and slow approach.

According to media reports, Sissie Hsiao, the Vice President of Product at Google leading the Bard team, is instilling the "wolf culture" in her subordinates.

For example, employees are required to work overtime on weekends and evenings to meet project deadlines. Some employees describe Bard as being in a "wartime" state, with "Bard speed" being much faster than other departments at Google. Legal reviews of new features that used to take a quarter to prepare can now be completed within a week.

Two insiders told the media that shortly after the launch of the first version of Bard, when a Bard employee asked Sissie Hsiao about work-life balance concerns, Hsiao stated that anyone with such concerns should consult their manager to see if the Bard team is suitable for them.

Hsiao is a heavyweight figure at Google and has been responsible for Google's advertising and Play Store business, making her a skilled money-maker. Her appointment to lead the Bard team also demonstrates Google's emphasis on Bard.

Bard was launched in March this year, targeting OpenAI's ChatGPT, and is capable of performing similar tasks such as coding, summarizing documents, and generating articles or marketing copy based on simple prompts.

Currently, the Bard team has grown to hundreds of people, but it still lags far behind its competitor OpenAI. According to media reports, OpenAI's annual revenue has reached $1.3 billion. Bard, on the other hand, does not yet have a decent product and the team is under tremendous pressure, forcing them to take swift action.