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Big Tech Depends on AI Shining Through Cloud Haze

Amazon’s AWS, Microsoft’s Azure and Google’s Cloud segments generated a combined $157 billion in revenue last year. But, according to consensus estimates from FactSet and Visible Alpha, that combined revenue is expected to show 21% year-over-year growth for the March quarter—4 percentage points lower than the growth shown in the December quarter and the lowest combined growth on record for the three. The June quarter is expected to show further deceleration, with combined revenue growth falling below the 20% threshold. Amazon’s AWS—the largest of the three—is expected to increase first-quarter revenue by just 15% year over year, which would be its slowest growth on record. Operating earnings for that segment are also expected to slide by 17%, year over year. Analysts also expect record-low growth for Microsoft’s Azure of 27% year over year. Google Cloud, a little over half the size of Azure, is expected to increase revenue at only a slightly better pace of 29% for the first quarter. But the search giant might have some better news on its bottom line, at least optically. According to a filing Thursday, Google is reallocating some expenses from its cloud business to its core search segment. The reclassifications trimmed more than $1 billion from the cloud segment’s reported operating loss for 2022 and will likely help the unit tip into profitability sooner. Microsoft was the first to hop on the bandwagon, with Chief Executive Officer Satya Nadella announcing in mid-January a plan to adopt the popular ChatGPT technology from OpenAI across its products. It is too early for generative AI technology to be driving much if any revenue for all three companies, but it isn’t too early for the costs of those projects to start hitting their bottom lines. And those higher costs will come as the slumping economy compels more large companies to slow down their tech spending. Tim Horan of Oppenheimer trimmed his estimates for Amazon’s AWS and Microsoft’s Azure businesses earlier this month, noting that “enterprises are sweating legacy on-prem infrastructure longer as they take a wait-and-see approach to the economy.”

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