Microsoft (MSFT) stock jumped on Wednesday after a strong quarterly report highlighted the company’s advances in artificial intelligence and its perceived lead over rival Alphabet (GOOGL), Google’s parent company.
After beating Google to the AI punch with a ChatGPT integration and a $10 billion investment in OpenAI, Microsoft is now waging war on Google’s longtime territory: search.
“We look forward to continuing this journey in what is a generational shift in the biggest software category, search,” Microsoft Chairman and CEO Satya Nadella said on the company’s earnings call. Tuesday evening.
Microsoft posted 10% revenue growth in search, citing market 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 quadrupled since launching 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 posted 2% growth in the category.
“It’s a generational paradigm shift,” Ted Mortonson, Baird’s technology strategist, told Yahoo Finance Live. “I would say Microsoft is holding a lot of cards right now.”
Microsoft shares rose 8.5% in intraday trading while Alphabet shares edged above the flatline in midday trading.
A year ago, Microsoft didn’t mention Bing once in its earnings call. The search engine hasn’t been a growth engine for Microsoft in the past, at least not at the level where search fuels Alphabet’s narrative, where “Google Search and the like” accounts for more than half of the company’s revenue. ‘business.
Google, for its part, defended its longstanding dominance in search throughout its Tuesday night call, with CEO Sundar Pichai noting, “Obviously in search we’ve been using AI for quite some time.”
Guggenheim analyst John DiFucci, who has a sell rating on Microsoft, points out that Bing’s growth has been remarkable. Bing’s growth in the quarter reversed a five-quarter downward trend, according to DiFucci.
“Another line we haven’t focused on in the past, but probably should move forward, is Bing,” DiFucci wrote in a note to clients. “We assume that if Microsoft can be an outsized beneficiary of Generative AI (Chat GPT), it will show up in this row.”
Among other catalysts, Microsoft’s position in AI pushed DiFucci’s price target on Microsoft 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 also be crucial.
Microsoft now has 10 times more Azure OpenAI service customers than last quarter, with more than 2,500 Azure OpenAI service customers, according to company results. Revenue from Azure and other cloud services grew 27% in the third quarter compared to the same period a year earlier. Citi believes that AI could represent a growth point for Azure in the next quarter.
“Azure has been a part of customers continuing to choose our ubiquitous cloud-to-edge computing fabric, especially as every application becomes powered by AI,” Nadella said on the call. “We have the most powerful AI infrastructure, and it’s used by our partner, OpenAI, as well as NVIDIA and leading AI startups like Adept and Inflection to train great models.”
So while “Googling” remains a verb, the search environment changes. Google’s tease of its ChatGPT competitor, Bard, failed. Gen Z uses TikTok for search, ChatGPT is the fastest-growing app in history, and Microsoft wants to participate in search more than ever.
“(Microsoft) is almost a bit like Death Star technology if you will,” Mortonson said. “Microsoft has incredible management executing. In that regard, as you move into generative AI, they’ve been working with OpenAI for years and have a huge investment. It is powered by Nvidia and based on Azure. That’s a pretty big initial advantage in this next war.”
Josh is a reporter for Yahoo Finance.
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