AI is finally resulting in real growth for big tech

The breadth of demand is good news for startups everywhere

Generative AI technologies are being suffused into a host of software applications aimed at businesses and consumers alike, and the financial results of all that investment are starting to show up.

A close-reading of Alphabet and Microsoft’s third-quarter results shows that new AI tech is helping some of the world’s biggest companies grow their revenues. Even better, these companies are seeing AI growing in areas that are broad enough to indicate strong market demand for software that runs off generative AI. That’s good news for the plethora of startups building in the fast-expanding space.

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We’re going to cover a lot of positive news today, but the two companies’ reports yesterday engendered varying reactions from investors. Alphabet’s shares are down more than 8.5% this morning, while Microsoft’s stock is up nearly 4%.

This morning, I want to quickly parse the two tech companies’ earnings through the cloud and AI lens, and then glean what I can from their post-results conference calls. We’ll then apply all of it to startups at the end.

The demand for AI-powered tech is real

Alphabet’s revenue and net profit both beat street expectations, coming in at $76.69 billion and $1.55 per share, respectively. YouTube, a key source of advertising incomes at the search giant, also did well. However, Alphabet’s cloud revenue of $8.41 billion came in under expectations by around $20 million, CNBC reports. Investors did not like that at all.

Microsoft’s revenue and net profit also both beat street estimates, landing at $56.52 billion and $2.99 per share, respectively. Revenue from its “Intelligent Cloud” business group rose 21% year-on-year, including going up 29% at Azure, three percentage points better than analysts expected. Investors liked that a lot.

The market’s reaction to the two sets of data provides their grading, but we care about the AI-related components that went into the top-line numbers. This is due to the scale of both companies, and the various market forces that impact their growth and profitability.

For our purposes, we want to zoom in on the impact AI is having on their results to arrive at some conclusions for startup founders. Starting with Alphabet’s conference call, here are some notes that stood out: