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Amazon, Microsoft and Google cloud services bet heavily on AI, but do their customers even want it?


“A” followed by “I” may be the two most frequently spoken letters in the business world this year, but the technology is not as high a priority as one might think when it comes to executives who are planning to spend company money on cloud services over the next two years.

Jefferies analyst Brent Thill surveyed chief information officers from 40 U.S. companies and found that artificial intelligence and machine learning, or AI/ML, didn’t even crack their top five priorities when it comes to cloud consumption habits, expectations and planned spending over the next 24 months. Out of nine categories, AI was only the seventh-highest priority for CIOs, below Thill’s expectations, as he wrote in a Thursday note.

By cloud spending, Thill means spending on cloud-service providers — or, as the industry likes to call them, “hyperscalers” — like Amazon.com Inc.’s
AMZN,
+0.28%

Amazon Web Services, Microsoft Corp.’s
MSFT,
+0.75%

Azure, Alphabet Inc.’s
GOOG,
+0.70%

GOOGL,
+0.71%

Google Cloud Platform, and Oracle Corp.’s
ORCL,
+1.55%

Cloud Infrastructure. But, as recession fears have weighed over the past year, businesses have been notably conservative on their spending.

Security, price and applications topped the CIOs’ list, Thill said. With the “vast majority” of CIOs planning for IT budgets to grow in 2023 and 2024, Thill said AWS appears to be the best positioned in the cloud sector over the next 24 months.

“Amazon remains the de facto cloud provider, but Azure does not appear far behind,” Thill said, noting that 48% of CIOs surveyed reported that AWS was their primary cloud provider, while 43% said Azure, 8% said GCP and 3% said Oracle.


Jefferies

In the second half of 2023, hyperscalers are expected to drive sales of chips made by the likes of Nvidia Corp.
NVDA,
-1.10%
,
Advanced Micro Devices Inc.
AMD,
+0.02%

and Intel Corp.
INTC,
-2.13%

to build out data centers to accommodate enormous AI workloads. As a result of the AI hype, shares of Nvidia have surged 215% this year alone, while AMD’s shares have rallied 79%, leading to gains for the PHLX Semiconductor Index
SOX,
-1.23%
,
which has advanced 50% this year.

Read: AMD, Nvidia face ‘tight’ budgets from cloud-service providers even as AI grows

Additionally, Microsoft has invested billions in OpenAI’s ChatGPT, while Google also offers generative-AI products Bard and Google Cloud enterprise offerings, and Amazon offers free machine-learning tools for users.

For those CIOs who place a premium on AI, however, Thill said Google Cloud Platform looks to be the preferred provider, as AI/ML and analytics databases were the top reasons given by those CIOs who planned to increase spending on it.

Read: Nvidia CEO expects AI revenue to grow from ‘tiny, tiny, tiny’ to ‘quite large’ in the next 12 months

Thill has buy ratings on Amazon, Microsoft and Alphabet, but for cloud services over the next two years, AWS comes out ahead overall. Many businesses, however, use more than one cloud-service provider. Of those surveyed, 53% said they expected to increase spending on AWS, compared with 40% who said they expected to increase their Azure spending, and 15% who planned to increase Google Cloud spending.

“Encouragingly, we highlight that the gap between those who plan to increase spend vs. those who plan to decrease spend was also highest for AWS, indicating that organizations are sticking with the de facto cloud option as they continue to lean in on their digital transformation,” Thill wrote.

Amazon shares are up 59.9% for the year, while Microsoft shares are up 42.9%, both classes of Alphabet shares are up about 41%, and Oracle shares have gained 43.7%.

In comparison, for the year, the tech-heavy Nasdaq Composite Index
COMP,
-0.18%

has rallied 35.1%, the Dow Jones Industrial Average
DJIA,
+0.33%
,
with Microsoft among its 30 components, is up 3.8%, and the S&P 500
SPX,
-0.10%

has advanced 17.5%.



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