Microsoft CEO Satya Nadella speaks at the World Economic Forum in Davos, Switzerland, on January 16, 2024.
Chris Ratcliff | Bloomberg | Getty Images
Amazon Web Services is still the cloud leader. But Microsoft is quickly closing the gap.
While Microsoft does not disclose revenue figures for its Azure cloud infrastructure, analyst figures show that five years ago it was half that of AWS. Now, it is about three-quarters the size of its top rival, analysts estimate.
Part of Microsoft’s recent momentum is due to artificial intelligence.
Amy Hood, the company’s chief financial officer, said on Microsoft’s Jan. 30 earnings call that 6 units of revenue growth in the Azure and cloud services division came from artificial intelligence in the latest period, up from 3 units in the previous quarter.
Overall, Azure revenue grew 30% in the quarter, compared to 13% year-over-year growth at AWS.
Microsoft has added graphics processing units (GPUs) to its data centers so customers can run AI models on Azure. This includes GPT-4, a large language model that enables text conversations with OpenAI’s ChatGPT chatbot. Many businesses have added similar AI-powered capabilities to their products.
“We now have 53,000 Azure AI customers,” CEO Satya Nadella told analysts on the company’s earnings call.
Jamin Ball, a partner at investment firm Altimeter Capital, said it appears that some companies are considering Azure specifically because of the excitement surrounding artificial intelligence and Microsoft’s market lead due to its close relationship with OpenAI.
AWS took months to come up with a model that could accommodate GPT-4. The company now offers a number of models in addition to its own, including one from Anthropic, which was backed by Amazon. On the company’s fourth-quarter earnings call, Amazon CEO Andy Jassy said AWS offers “the most extensive collection of compute instances with Nvidia brands’, and that customers including Airbnb and Break uses native AI processors.
An AWS spokesperson referred CNBC to Jassy’s comments from the earnings call, including that the company added more incremental revenue in the quarter than “any other cloud provider as far as we can tell.”
Jassy also said that genetic AI is expected to “ultimately generate tens of billions of dollars in revenue for Amazon over the next several years.”
As it stands now, Azure is growing much faster.
And as cloud infrastructure has become a bigger part of Microsoft, making up about 29% of the company’s total revenue, it has also become a major contributor to profits.
Microsoft, which recently surpassed apple to become the world’s most valuable public company, generating nearly $83 billion in net income in 2023, up from $67 billion the previous year. The Intelligent Cloud segment that contains Azure generated 46% of Microsoft’s total operating revenue, up from about 27% in 2016.
In addition to providing core computing and storage, Microsoft offers a variety of services for developers, including high-margin databases and monitoring tools.
Gross margin in Microsoft’s cloud group expanded from 42% in 2016 to 72% in the most recent quarter. The segment includes commercial Office subscriptions, the commercial portion of LinkedIn and Dynamics 365 enterprise software, as well as Azure. Hood said performance gains can come from improvements in power, cooling, data center design, chips and software.
Yun Kim, an analyst at Loop Capital, said in a note that Azure’s revenue growth may accelerate.
“We expect its Azure business to accelerate starting next FY (or C2H) as new workloads from both new cloud deployments and GenAI initiatives grow significantly,” he wrote.
Don’t miss these stories from CNBC PRO:
I’M WATCHING: Amazon has the most upside among Big Tech stocks, says Evercore ISI’s Mark Mahaney