Microsoft’s AI growth is helping its cloud business weaken Amazon’s lead

13.02.2024

Amazon Web Services (AWS) continues to lead in the cloud space, but Microsoft is rapidly narrowing the gap. Although Microsoft doesn’t disclose specific revenue figures for its Azure cloud infrastructure, analysts estimate that it has grown from being half the size of AWS five years ago to approximately three-quarters of its rival’s size today.

One significant factor contributing to Microsoft’s recent success is its emphasis on artificial intelligence (AI). During the earnings call on January 30, Microsoft’s finance chief, Amy Hood, revealed that 6 points of revenue growth in the Azure and cloud services division were attributed to AI in the latest quarter, doubling from the prior quarter. The overall revenue at Azure increased by 30% in the quarter, surpassing AWS’s year-over-year growth rate of 13%.

Microsoft has strategically incorporated graphics processing units (GPUs) into its data centers, enabling clients to run AI models in Azure. This includes the deployment of GPT-4, a substantial language model facilitating text conversations, such as those with OpenAI’s ChatGPT chatbot. The company’s commitment to AI is evident as it boasts 53,000 Azure AI customers.

Jamin Ball from Altimeter Capital notes that Azure’s appeal is fueled by the excitement surrounding AI, and Microsoft’s perceived lead in the market due to its close collaboration with OpenAI. In contrast, AWS took some time to introduce a model comparable to GPT-4.

While AWS CEO Andy Jassy asserts their position with a diverse collection of compute instances, Microsoft’s Azure is currently growing at a faster rate. Microsoft’s Azure revenue growth is expected to accelerate, with analysts predicting positive impacts from new workloads resulting from cloud deployments and emerging initiatives in generative AI.

As cloud infrastructure becomes a more substantial part of Microsoft’s business, accounting for around 29% of the company’s total revenue, it also significantly contributes to profits. In 2023, Microsoft, now the world’s most valuable public company, generated almost $83 billion in net income, with the Intelligent Cloud segment, including Azure, contributing 46% of the total operating income.

Microsoft’s cloud division offers various services for developers, including high-margin databases and monitoring tools, contributing to the gross margin widening from 42% in 2016 to 72% in the most recent quarter. Analysts, like Yun Kim from Loop Capital, anticipate Azure’s revenue growth to accelerate further in the upcoming fiscal year, driven by new workloads and initiatives in generative AI.