Source: Geek Park
Author: Zheng Yue

In the beginning of 2024, overseas Internet giants began to realize the commercialization potential of AI business.

This past week,$Alphabet-C (GOOG.US)$/$Alphabet-A (GOOGL.US)$,$Microsoft (MSFT.US)$,$Meta Platforms (META.US)$Financial reports for the first quarter of 2024 were announced one after another, and the three had both joys and worries. Microsoft and Google rose 4% and 15% respectively after the earnings report was released. The latter hit a record high; in contrast, Meta experienced Waterloo, and its stock price fell 19% at one point after the earnings report was released.

After the advent of the generative AI boom, these three giant companies in the Internet era were also dubbed the “Big Three AI Companies in Silicon Valley” by some domestic media because of their overall investment in AI in business. However, in the latest financial report of the “Big Three”, AI has also become the absolute protagonist, and the rise and fall in stock prices also reflects investors' approval of the current status and future strategies of their AI business.

Microsoft's smart cloud business performed well, but the sharp rise in its stock price over the past year already represents the market's high expectations, so today's results can only be said to be in line with expectations, so it ended with a slight increase; Google, as the former leader in the AI industry, fell short of expectations in the first half of this wave, and today's rise is more of a surprise brought about by financial reports exceeding expectations.

As for Meta's sharp decline, it is due to its lively performance in big models and open source, but on the one hand, the cloud business is weak and there is no effective path for AI monetization. At the same time, Xiaoza announced that it would burn money on AI. This has aroused investors' historical shadow over Meta's “All in Meta Universe.”

But no matter what, Google, Microsoft, and Meta are currently the hottest giants in the AI field in Silicon Valley. Their thoughts, routes, and observations all reflect the current development trend of the AI industry to a certain extent. Geek Park sorted out the valuable information on AI in the three financial reports. To a certain extent, we have seen the AI industry issues that global investors are paying attention to.

01 Microsoft: AI boosts cloud revenue growth

Microsoft has the highest AI content among these three financial reports.

Microsoft has kept its promise, and every time it releases quarterly earnings reports, it announces percentage points of the increase in cloud revenue brought about by AI. The data this time is also very beautiful. With good revenue, it's not a problem to increase investment.

Microsoft announced the third quarter of fiscal year 2024, covering the first full quarter of Microsoft 365 Copilot's sales since its launch for commercial customers in November last year. Revenue for the quarter was $61.9 billion, up 17% year over year. Net profit was $21.9 billion, up 20% year over year, and earnings per share after amortization were $2.94.

By sector, productivity and business process revenue was $19.6 billion, up 12%; smart cloud revenue was $26.7 billion, up 21%; and revenue from other personal computing businesses was $15.6 billion, down 17%.

Among them, the intelligent cloud with the highest AI content is Microsoft's growth engine. Its revenue share has reached 43%, and the third fiscal quarter increased 21% over the same period last year. The growth rate exceeded market expectations of 18%, and was also higher than 20.4% in the previous quarter.

Among them, the 31% increase in revenue from Azure and other cloud services is impressive, higher than the previous two quarters and market expectations of 28.6%.

Here's the point. Artificial intelligence contributed about 7% of the 31% revenue growth of Azure cloud services. In the first two quarters, AI contributed 6% and 3%, respectively.

Microsoft CEO Nadella said that the number of cloud transactions over $100 million with Microsoft increased 80% year-on-year in the quarter, and the number of transactions over 10 million US dollars doubled.

Through collaboration with OpenAI, Microsoft has basically quickly incorporated its AI advantages into a series of product lines, including a series of productivity software products such as the cloud platform Azure, Office, and Windows, as well as Microsoft 365 Copilot and the search engine brand Bing.

Revenue from Office commercial products and cloud services increased 13%, due to a 15% increase in Microsoft 365 Copilot commercial revenue.

The earnings conference revealed that over 65% of Fortune 500 companies use Azure OpenAI services. Azure Arc now has 33,000 customers, a year-over-year increase of more than 2 times. GitHub Copilot has 1.8 million paying users and is growing more than 35% quarterly. Power Platform now has over 25 million monthly active users, up more than 40% year over year.

Nadella said, “Microsoft Copilot (personal AI assistant) and Copilot Stack (enterprise AI service) are witnessing a new era of artificial intelligence transformation, bringing better business outcomes for every role and industry.”

With income, people don't care that much about things that require ongoing expenses. Microsoft's AI-driven capital expenditure for the third quarter of fiscal year 2023 was $1 billion higher than analysts' estimates, and capital expenditure increased to $14 billion from $11.5 billion in the previous quarter.

Amy Hood, executive vice president and CFO of Microsoft, said capital expenditure is expected to continue to increase to further support cloud and infrastructure and model training. The significance of these large-scale expenses should be viewed in a form that goes beyond the short term, with a particular focus on the potential of AI to impact various business processes.

02 Google: AI brings profit inflection point to cloud business

Google's earnings also comprehensively exceeded expectations. Although Google Cloud's market share is much smaller than Microsoft Cloud, the leader in the cloud sector, in this financial report, Google's continued profit in the cloud business has seen a return on investment.

Overall, Google's parent company Alphabet released its financial report for the first quarter of 2024 up to March 31. The quarterly revenue was US$80.5 billion, up 15% year on year, making it the fastest quarter of the company's revenue growth since the beginning of 2022; net profit of US$23.7 billion, a sharp increase of 57% year over year. After the news was announced, Alphabet's stock price once rose nearly 15%.

In the AI-supported cloud business segment, Google Cloud's revenue reached 9.6 billion US dollars this fiscal quarter, an increase of 28.4% over the previous year. There was an increase of 25.7% to US$9.19 billion in the fourth quarter of last year. The increase for several consecutive quarters doubled compared to overall revenue growth.

More importantly, profit data. The operating profit of Google Cloud's business grew to $900 million, compared to only $190 million in the same period last year. Furthermore, the Google Cloud business just got rid of losses last year, and the continuous increase in operating profit means that years of investment have finally yielded impressive returns.

The share of the cloud business in Google's total revenue has also increased. For the whole of 2023, Google Cloud's revenue accounted for 10.8% of total revenue. This quarter, Google Cloud's share increased to 11.9%, but the gap compared to the 43% revenue share of Microsoft's cloud business is not small.

Google Cloud provides AI services to enterprise customers through its big language model Gemini. Alphabet CFO Ruth Porat said positively that Google's cloud division's $9.6 billion revenue partly reflects “the growing contribution of artificial intelligence.”

The AI investment race also must not be left behind. Google spent $12 billion this fiscal quarter, $1.7 billion more than expected. According to Ruth Porat, spending was mainly driven by investment in technology infrastructure, with servers accounting for the largest share, followed by data centers. “The sharp year-on-year increase in capital expenditure in recent quarters reflects our firm confidence in AI technology's ability to create more opportunities for the overall business.”

Google is also undergoing organizational changes around AI. On April 18, Google announced that the AI model development team of Google's service division, which was previously part of Google Research, will be part of Google DeepMind and report directly to Alphabet Group executives, and is expected to begin in the second quarter of 2024.

Google's core revenue actually comes from the advertising business, and the term “advertising+AI” was also mentioned by Google and Meta at the same time. Google ad revenue for the quarter was $61.6 billion, up 13% from $54.5 billion in the same period last year. In the ad business, Google search and other ad revenue was $46.2 billion, and YouTube ad revenue was $8.1 billion, both of which saw double-digit growth.

03 Meta: AI will still burn money for several years

Meta's earnings report was actually good, but the market was frightened by anticipated spending.

Zuckerberg talked about Llama 3 and Meta AI during the earnings call, but when he talked about burning money, the stock price fell 19% in response.

Meta, the only one whose stock price dropped after the Big Three financial reports this time, was a bit aggrieved, but not much.

What is disappointing is that Meta's earnings report is actually doing very well. Meta's results for the first fiscal quarter of fiscal year 2024 ended March 31, 2024, with revenue of US$36.455 billion, up 27% year over year, the biggest increase in Meta's revenue in three years. Net profit increased 117% year over year to $12.369 billion, operating profit was $13.82 billion, up $13.82 billion year over year, and operating margin 38%.

Revenue still depends entirely on advertising.

Of this $36.455 billion in revenue, advertising revenue was $35.635 billion, which increased to 98%. The app family, which includes Instagram, Facebook, and WhatsApp, had revenue of $36.015 billion in the first quarter. Even the year-on-year growth data for the three components of total revenue, advertising revenue, and app family revenue is exactly the same, all of which are 27%.

User data is also growing. In March 2024, the average number of daily active Meta app families (DAPs) was 3.24 billion, up 7% year over year. Meanwhile, after Zuckerberg called out the “Year of Efficiency,” the results of the major layoffs were remarkable. As of March 31, 2024, the number of Meta employees was 69,329, down 10% from the previous year. Meta's total costs and expenses increased 6% to $22.637 billion in FY2024 Q1. Many people are unhappy with such a beautiful financial report but the stock price plummeted. The highest drop after the earnings report was released reached 19%. What's even more ridiculous is that Tesla's stock price has risen sharply, and no one can do it at all.

But the reason Meta isn't aggrieved is that Zuckerberg did have “thunder” in his honest conference speech.

One is that revenue expectations for the second quarter were relatively weak. They did not exceed expectations as much as in the previous quarter. The median figure of 37.8 billion yuan was slightly less than the 38.3 billion yuan expected by the market. The other is Zuckerberg's “money-burning” warning on AI. He raised expectations for operating expenses and capital expenses for the whole year, which may remind investors of his previous stock price nightmares when he was big in the “metaverse.”

Meta is actually the same as the other two companies. They spend a lot of time in meetings talking about AI, but he's talking about the need to increase spending on AI and vaccinating against AI not being able to make money in a short period of time. Zuckerberg said it will take years for Meta's AI business to develop into the “profitable service” he expected. Llama 3, which was just released before the financial report, is an open source project that has just been upgraded. It is allowed for commercial use and has received much attention. It is hoped that it will bring more opportunities to start up AI applications. As a C-end product, Meta AI incorporates Llama 3 capabilities. On websites and applications such as Facebook and Instagram, users can use Meta AI for free, talk to Meta AI, and use it to query information, generate images, and retrieve application content.

After boasting about his AI products, Zuckerberg said he was encouraged by the progress of Llama 3 and Meta AI and would invest more to stay ahead. However, it will take years for Meta's AI business to develop into the “profitable service” he expects.

Editor/Somer