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Zhidongxi (public account:zhidxcom）
authorvanilla
editLi Shuiqing

Zhidongxi reported on July 31 that early this morning,MicrosoftThe company released its Q4 financial report for fiscal year 2024, with quarterly revenue of US$64.727 billion, a year-on-year increase of 15%, with the growth rate slowing down; its net profit was US$22.036 billion, and the year-on-year growth rate decreased by 10 percentage points.

GoogleThe quarterly financial report released on July 24 also showed the same problem. Its quarterly revenue was US$84.742 billion, a year-on-year increase of 14%; its net profit was US$23.619 billion, a year-on-year decrease of 28 percentage points.

▲Comparison of year-on-year net profit growth of Google and Microsoft in the past three years

Although Microsoft and Google's revenues have grown steadily,Net profit growth rate dropped significantlyThe main reason is thatLarge capital investment in AIWhether it is acquiring, investing in AI startups, or building AI infrastructure, these two cloud giants are very generous.

This quarter, Microsoft and Google's capital investments wereUS$19 billion, US$13.2 billion, and the year-on-year growth rates were77.6%、91.4%。

However, the huge investments made by the two cloud giants in AI have not been fully reflected in the highly-watched AI "foundation" - the cloud business.

Microsoft Intelligent CloudRevenue in this quarter fell short of expectations, with quarterly revenue of US$28.515 billion, a year-on-year increase of 19%. The growth rate has declined, and it is expected that growth will continue to slow in the next quarter.

Google CloudBoosted by AI, its cloud business grew 29% year-on-year, better than Microsoft’s. It is worth mentioning that this is also Google Cloud’sAchieved quarterly revenue of more than $10 billion for the first time，Quarterly operating profit exceeds $1 billion。

On January 31 this year, Microsoft and Google announced their 2023 financial reports on the same day, staging a performance competition. At that time, Google's overall performance growth in AI lagged behind Microsoft. Half a year later, Google Cloud began to exert its strength, and its business breakthrough was reflected in the revenue growth rate.

After the earnings report was released today, Microsoft's stock price fell 7% after the market, and then the decline narrowed rapidly, and finally fell 2.7%. As of writing, Microsoft's stock price was $422.92, down 0.89% from yesterday's closing, with a market value of $3.14 trillion.

▲Microsoft stock price

After Google released its earnings report, it fell more than 3% during the day before rebounding and finally rose more than 2% after the market closed. As of writing, Google's stock price was $171.86, down 6.3% from the after-hours stock price on the day the earnings report was released, with a market value of $2.11 trillion.

▲Google stock price

1. Quarterly revenue grew steadily, but year-on-year growth rates slowed down

MicrosoftRevenue in Q4 of fiscal year 2024 (corresponding to Q2 of natural year 2024) was US$64.727 billion, a year-on-year increase of 15%, slightly higher than the expected US$64.476 billion.

The chart below shows its revenue and growth over the past three years, which has increased steadily since 2023, but the growth rate has slowed down in the last two quarters.

▲Microsoft’s revenue and growth in the past three years

For the entire fiscal year 2024, Microsoft's total revenue was US$245.122 billion, a year-on-year increase of 16%; net profit was US$88.136 billion, a year-on-year increase of 22%.

All of Microsoft's businesses have grown steadily. According to Microsoft CEO Satya Nadella, the application of generative AI has saved Microsoft hundreds of millions of dollars in user support and contact center operating costs. From the data, the number of Microsoft's user devices has increased by 60% month-on-month, and more and more users are choosing to repurchase and renew services.

Look againGoogleHere, its Q2 2024 revenue was US$84.742 billion, a year-on-year increase of 14%, exceeding analysts' expectations.

Google's revenue growth trend in the past three years is similar to that of Microsoft. Both reached their lowest point at the end of 2022 and then rebounded, and the growth rate has slowed down in the last two quarters.

▲Google’s revenue and growth in the past three years

Google's revenue from each business exceeded expectations this quarter, with only advertising revenue from YouTube falling short of expectations. The highly anticipated Google Cloud business accelerated its growth, reaching quarterly revenue of more than $10 billion and quarterly operating profit of more than $1 billion for the first time.

Ruth Porat, chief investment officer of Google's parent company Alphabet, said in an earnings call that Google's advantages in AI infrastructure and generative AI solutions for cloud customers have brought growth, and customers will seek help from Google as they expand their capabilities.

The search business contributed the most to Google's total revenue growth, especially in the retail industry. Analysts previously said that Google's core advertising business weakened due to economic weakness and increased competition from TikTok in 2022, but advertising revenue has been steadily increasing since the negative growth of the business was announced in Q4 2022.

2. Microsoft Intelligent Cloud growth slowed down, and Google Cloud's quarterly revenue exceeded 10 billion for the first time

In the cloud business, the "foundation" of AI, Google Cloud has been catching up with the market share of the industry's top two, Amazon Web Services (AWS) and Microsoft Intelligent Cloud. According to data from market research firm Synergy Research Group, AWS, Microsoft Intelligent Cloud, and Google Cloud had global market shares of 31%, 25%, and 11% respectively in Q1 2024.

Microsoft Intelligent CloudIn fiscal year 2024, Q4 revenue was lower than expected, with quarterly revenue of US$28.515 billion, a year-on-year increase of 19%, and the growth rate has slowed down. Since Q2 2023, the year-on-year growth rate of Microsoft Intelligent Cloud has basically remained at around 20%, indicating that the payback period of huge AI investment in cloud business may be longer than expected.

▲Microsoft Intelligent Cloud’s revenue and growth in the past three years

Microsoft has three major business segments, including productivity and enterprise process business, intelligent cloud business, and personal computing business, with revenues of $20.3 billion, $28.5 billion, and $15.9 billion respectively this quarter. This quarter, Microsoft's intelligent cloud business accounted for 44% of total revenue, making it Microsoft's largest revenue segment.

▲Microsoft's revenue share of each business segment in Q4 of fiscal year 2024

Microsoft Intelligent Cloud includes business segments such as Azure public cloud platform, Microsoft 365 productivity cloud platform, and Microsoft Dynamics 365 business intelligence application platform.

Azure cloud computing services have been Microsoft's main growth engine in recent years, with revenue growing 29% this quarter, slowing from 31% growth in the previous quarter. About 8 percentage points of growth came from AI. Microsoft Chief Financial Officer Amy Hood said in a financial report conference call that Azure's growth will continue to slow in the next quarter ending in September, but investments in data centers and servers will accelerate Azure's growth in the second half of fiscal 2025.

Google CloudHere, in Q2 2024, revenue reached $10.347 billion, a year-on-year increase of 29%, and operating profit tripled to $1.172 billion. It is worth noting that this is the first time that Google Cloud has achieved quarterly revenue of more than $10 billion and quarterly operating profit of more than $1 billion.

The figure below shows the changes in revenue growth rates of Microsoft Intelligent Cloud and Google Cloud in the past three years. It can be seen that after experiencing a brief decline in growth rate in Q4 2023, Google Cloud quickly caught up and widened the gap in revenue growth rate with Microsoft Intelligent Cloud.

▲Comparison of year-on-year revenue growth of Google Cloud and Microsoft Intelligent Cloud in the past three years

But from the perspective of the overall business, Google Cloud's revenue accounts for only 12%, and its scale is still relatively small, and its impact on Google's overall market is relatively low.

▲Google's revenue share of each business in Q2 2024

In mid-July, Google was reported to be planning to acquire Wiz, a cybersecurity startup, for $23 billion, but the negotiations fell through before the earnings report was released. The deal was originally the largest acquisition in Google's history and was seen as one of its important moves to catch up with AWS and Microsoft's intelligent cloud.

In a conference call with reporters, Google CFO Ruth Porat declined to comment on the specific reasons for the breakdown of the negotiations. A person familiar with the matter told foreign media that the Microsoft blue screen incident that affected the world on July 19 was an important reason for the failure of the negotiations between Google and Wiz.Increased market interest in cloud security services companies such as Wiz, and enhance its potential value.

3. The growth rate of net profit slowed down.AIReturn on investment in 15 years?

In the past six months,MicrosoftMicrosoft has invested heavily in Mistral AI, Inflection AI and other large-scale model startups to find new support points outside of OpenAI. According to the financial report, Microsoft's capital expenditure this quarter was as high as $19 billion, a year-on-year increase of 77.6%. Its capital expenditure in the previous quarter was $14 billion.

However, Microsoft's profitability has not kept up with its capital investment. Its net profit in Q4 of fiscal year 2024 was US$22.036 billion, a year-on-year increase of 10%. Since the last quarter, its net profit growth rate has dropped significantly, with the year-on-year growth rates of net profit in the last three quarters being 33%, 20%, and 10%, respectively.

▲Microsoft's net profit and growth in the past three years

During the earnings call, Microsoft Chief Financial Officer Amy Hood said that cloud computing and AI-related spending accounted for almost all capital expenditures, of which about half was infrastructure construction.

Microsoft will continue to expand infrastructure investment, build and lease data centers, and capital expenditures are expected to continue to grow in fiscal 2025. Amy Hood said that these expenditures are necessary for the demand for AI services and may take 15 years or even longer to pay off.

GoogleHere, its parent company Alphabet's net profit in Q2 2024 was US$23.619 billion, a year-on-year increase of 29%, a significant decrease from 57% in the previous quarter.

▲Google’s net profit and growth in the past three years

Like Microsoft, Google's declining net profit growth rate is also related to the increase in capital expenditures. This quarter, Alphabet's capital expenditures reached $13.2 billion, up 91.4% from the same period last year. This is related to Google's efforts to build more data centers and purchase AI chips. Among them, Alphabet spent $2.2 billion on the construction of AI models in the second quarter, which is twice the $1.1 billion spent in the same period last year.

Unfortunately, the huge investments in AI have brought limited growth in revenue, which has caused investors to show fatigue with the large-scale AI investments of technology companies. Both Google and Microsoft saw their stock prices fall after announcing their results.

Conclusion:AIGoogle Cloud has a long payback period, and its growth rate has surpassed Microsoft

Through the quarterly financial reports of the two technology giants, Microsoft and Google, we can see that both achieved growth in revenue and net profit in Q2 2024, but the growth rate has slowed down. In the cloud business, although Microsoft Intelligent Cloud still occupies a large share, its growth rate faces challenges; Google Cloud has made significant breakthroughs, but its overall share is still small. The rising cost of AI investment has put pressure on the net profit growth of the two companies and made investors more cautious.

In the future, how to balance AI investment and returns and maintain steady growth will be the key issues that Microsoft and Google need to think about and solve. This is not only related to the short-term performance of the two companies, but will also determine their long-term competitiveness and development prospects in the technology industry.