Microsoft ‘holds many of the cards’ in the AI-driven search war with Google

Microsoft ( MSFT ) stock rose on Wednesday after a strong quarterly report highlighted the company’s progress in artificial intelligence and its lead over rival Alphabet ( GOOGL ), the parent company of Google.

After beating Google to the AI ​​punch with ChatGPT integration and a $10 billion investment in OpenAI, Microsoft is now waging war on Google’s long-owned turf: Search.

“We look forward to continuing this journey in size and generational change in the largest software category, search,” said Microsoft Chairman and CEO Satya Nadella on the company’s earnings call Tuesday night.

Microsoft posted 10% search revenue growth, citing share gains for Bing and its Edge browser (a direct competitor to Google Chrome). Bing now has more than 100 million daily active users and daily installs of the Bing mobile app have increased fourfold since the launch of 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 saw 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 the cards right now.”

Microsoft shares rose as much as 8.5% in intraday trading while Alphabet shares ticked slightly above the flat line in midday trading.

A year ago, Microsoft didn’t mention Bing once on its earnings call. The search engine has not been a driver of growth for Microsoft in the past, at least not at the level that search drives the story for Alphabet, where “Google” accounts for more than half of the company’s revenue. Search and others”.

Google, for its part, defended its longtime search dominance during its call Tuesday night, with CEO Sundar Pichai saying, “Obviously, in search, AI has been using AI for some time.”

Guggenheim analyst John DiFucci, who has a Sell rating on Microsoft, points out that Bing’s growth is significant. Bing’s growth in the quarter reversed a five-quarter downward trend, according to DiFucci.

“Another line that we haven’t focused on in the past, but probably should go forward with is Bing,” DiFucci wrote in a note to clients. “We would like to assume that if Microsoft can be an outsized beneficiary of AI generation (Chat GPT), it would appear in this line.”

Among other catalysts, Microsoft’s position in AI pushed DiFucci’s price target on Microsoft up to $232 from $212.

The Microsoft logo is seen on the outside of their offices in Herzliya, near Tel Aviv, Israel December 27, 2022. REUTERS/Rami Amichay

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 key.

Microsoft now has 10 times more Azure OpenAI service customers than last quarter, with more than 2,500 Azure OpenAI service customers, according to the company’s earnings call. Azure and other cloud services revenue grew 27% in the third quarter compared to the same period a year earlier. Citi estimates that AI could be one point of growth for Azure in the next quarter.

Azure has taken share as customers continue to choose our ubiquitous cloud-to-edge computing fabric, especially when every application is AI-powered,” Nadella said on the call. “We have the most powerful AI infrastructure, and it’s being used by our partner, OpenAI, as well as NVIDIA and AI startups like Adept and Inflection to train large models.”

So, while “Googling” is still a buzzword, the search environment is changing. Google’s gaze turned to its ChatGPT competitor, Bard. Gen Z is using TikTok for search, ChatGPT is the fastest growing app in history and Microsoft is trying to get into search now more than ever.

“(Microsoft) is almost like the Death Star technology if you will,” Mortonson said. “Microsoft has incredible management that gets things done. To that end, as you move into the generational AI, they have been working with OpenAI for many years and are heavily invested. It is powered by Nvidia and sits on Azure. That’s a pretty big head start in this next war.”

Josh is a reporter for Yahoo Finance.

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