Microsoft (MSFT) stock surged on Wednesday after a strong quarterly report highlighted the company’s artificial intelligence advancements and its perceived lead against rival Alphabet (GOOGL), the parent company of Google.
After beating Google to the AI punch with a ChatGPT integration and $10 billion investment into OpenAI, Microsoft is now waging war on Google’s long-owned turf: Search.
“We look forward to continuing this journey in what is a generational shift in the largest software category, search,” Microsoft Chairman and CEO Satya Nadella said on the company’s earnings call Tuesday night.
Microsoft flaunted 10% revenue growth in search, citing share gains for Bing and its Edge browser (a direct competitor to Google Chrome). Bing now has more than 100 million daily active users while daily installs of the Bing mobile app have grown four times since the launch of the AI powered version of the product two months ago.
On the other hand, Google called its search revenue “resilient.” The long-time search leader saw 2% growth in the category.
“It is a generational paradigm shift," Ted Mortonson, Baird technology strategist, told Yahoo Finance Live. "I would say Microsoft is holding a lot of the cards right now.”
Microsoft shares rose as much as 8.5% in intraday trading while Alphabet shares ticked slightly above the flat line in midday trading.
A year ago, Microsoft didn’t mention Bing once on its earnings call. The search engine hasn’t been a growth driver for Microsoft in the past, at least not at the level that search drives the narrative for Alphabet, where “Google Search and other” accounts for more than half of the company’s revenue.
Google, for its part, defended it’s long-standing search dominance throughout its call on Tuesday night, with CEO Sundar Pichai noting, “Obviously, in search, we have been using AI for a while.”
Guggenheim analyst John DiFucci, who has a Sell rating on Microsoft, points out Bing’s growth as noteworthy. Bing’s growth in the quarter reversed a five-quarter downward trend, according to DiFucci.
“Another line we’ve not focused on in the past, but probably should going forward is Bing,” DiFucci wrote in a note to clients. “We’d assume that if Microsoft can be an outsized beneficiary of generative AI (Chat GPT), it would show up in this line.”
Among other catalysts, Microsoft's position in AI pushed DiFucci's price target on Microsoft up to $232 from $212.
While ChatGPT has been seen as the consumer-facing leader in the AI arms race, Microsoft believes its ability to tie the new technology to its Azure platform could be crucial as well.
Microsoft now has 10 times more Azure OpenAI service customers than last quarter, with more than 2,500 Azure OpenAI service customers, per the company’s earnings call. Azure and other cloud services revenue grew 27% in the third quarter compared to the same period a year prior. Citi estimates that AI could amount to one point of Azure’s growth in the next quarter.
“Azure took share as customers continue to choose our ubiquitous computing fabric from cloud to edge, especially as every application becomes AI-powered,” Nadella said on the call. “We have the most powerful AI infrastructure, and it is being used by our partner, OpenAI, as well as NVIDIA and leading AI start-ups like Adept and Inflection to train large models.”
So while “Googling” remains a verb, the environment in search is changing. Google's tease of its ChatGPT competitor, Bard, flopped. Gen Z is using TikTok for search, ChatGPT is the fastest growing app in history and Microsoft wants in on search now more than ever.
“(Microsoft) is almost kind of like the technology Death Star if you will,” Mortonson said. “Microsoft has incredible management that executes. In that respect, as you move into generative AI, they've been working with OpenAI for years and have a huge investment. It’s powered by Nvidia and sits on Azure. That’s a pretty big initial advantage in this next war."
Josh is a reporter for Yahoo Finance.
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