Satya Nadella, chief executive officer of Microsoft Corp., during the company’s Ignite Spotlight event in Seoul on Nov. 15, 2022.
SeongJoon Cho | Bloomberg | Getty Images
Google has for years been playing catch-up in the cloud infrastructure market, where it’s seen in the industry as a distant third in the U.S., behind Amazon and Microsoft. The challenge for investors is that the three companies don’t report cloud infrastructure metrics in a way that makes them easily comparable.
However, an internal estimate assembled by Google employees, based on a leaked Microsoft document and some extrapolation of other market statistics, suggests Google believes it’s closer to second place than analysts think.
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Google’s document estimates that Microsoft generated under $29 billion in Azure consumption revenue in the latest fiscal year, which ended June 30, reflecting the value of cloud infrastructure services used by clients. That’s several billion dollars less than what Wall Street analysts had forecast. Bank of America was the most bullish, predicting Azure would pull in $37.5 billion in fiscal 2022. Cowen predicted revenue of $33.9 billion and UBS said $32.3 billion.
The document from Google has Azure ending the 2022 fiscal year with an operating loss of almost $3 billion, down from a loss of more than $5 billion the prior year. It claims that Azure’s sales and marketing costs approached $10 billion, accounting for 34% of consumption revenue. Microsoft said sales and marketing costs for the whole company equaled 11% of revenue over the same period.
One analyst dismissed Google’s bottom-line tally.
“There’s no way it’s that big of a loss,” said Derrick Wood, an analyst at Cowen who has the equivalent of a buy rating on Microsoft stock. His research shows Azure boasting an operating margin above 30%, compared with Google’s estimate of a -10% margin.
Cloud represents one of the most high-stakes battles in technology, as the biggest and most well-capitalized U.S. tech companies try to win lucrative deals from large enterprises and government agencies, which are increasingly pushing critical computing and storage needs out of their own data centers.
Google and Microsoft have been investing heavily to keep Amazon Web Services from dominating the market the e-commerce company pioneered in 2006. But the companies aren’t completely forthcoming about their results.
Microsoft provides year-over-year growth for Azure and other cloud services but doesn’t give a dollar figure, nor does it specify how much of the growth comes just from Azure. The Azure and other cloud services metric also includes, among other things, enterprise mobility and security, or EMS, tools that can be sold separately.
Google parent Alphabet, meanwhile, doesn’t tell investors how much revenue or operating income the Google Cloud Platform, or GCP, generates. It only discloses those figures for what it calls Google Cloud, which includes subscriptions to Google Workspace collaboration software, as well as GCP, a direct Azure rival.
Amazon reports both revenue and operating income for AWS, giving investors the cleanest picture of its cloud business among the three companies. AWS recorded an operating margin of 26% in the third quarter, while Google’s cloud group reported an operating margin of -10%.
Microsoft has never laid out gross profit or operating profit for the Azure division. CEO Satya Nadella said in 2019 that customer adoption of “higher-level services” beyond raw computing and storage resources can lead to “good margins long term.”
According to data from Gartner, AWS controlled 39% of the global cloud infrastructure market in 2021, followed by Microsoft at 21%, China’s Alibaba at 9.5% and Google at 7.1%.
Representatives for Google and Microsoft declined to comment for this story.
How Google came up with its estimates
According to Google’s document, the analysis follows an Insider article, which cited a leaked Microsoft presentation that included Azure consumption revenue, or ACR, for its U.S. enterprise business in the past few years. Google said in its document that the leaked presentation allowed for a more accurate modeling of the business, and Google’s calculations suggest that ACR is the main source of revenue for Azure and other cloud services.
Google made a series of assumptions based on the leaked ACR information. It came up with a possible number for ACR abroad using Microsoft’s statement that around 51% of total revenue in fiscal 2022 derived from customers located in the U.S. Google then added in revenue from other customer segments, such as public sector and regulated industries, based on market data from Gartner and other sources.
To determine operating expenses, Google assumed that 65,000 people are dedicated to or work mainly on Azure, referring to an Insider report that said Microsoft’s Cloud and Artificial Intelligence organization had over 60,000 employees.
If Google is right, Microsoft’s ACR would be about 40% the size of Amazon’s AWS business and 27% larger than Google’s cloud business.
“Analysts include revenue allocations from EMS and Power BI, both of which are highly profitable SaaS businesses with estimated gross margins above 80%,” Google’s document says. “For a realistic analysis of Azure’s profitability these allocations have to be removed.”
Google concluded that Microsoft’s ACR growth slowed from 61% in the 2020 fiscal year to about 50% in the 2022 fiscal year. That’s faster growth than the figure Microsoft provides for all of Azure and other cloud services, which went from 56% expansion to 45% over the same period.
Google projected that Azure’s gross profit, or the revenue left after accounting for the cost of goods sold, expanded from below 29% in fiscal 2019 to almost 63% in fiscal 2022. Microsoft CFO Amy Hood has said hardware and software efficiencies helped the company widen Azure’s gross margin.
At those levels, cloud would be less profitable than Microsoft’s Windows and Office software franchises. Microsoft’s total gross margin in the 2022 fiscal year was about 68%.
None of the three U.S. market leaders announces gross margins for their cloud groups.
Cowen expects the broader Azure and other cloud services group to account for 27% of Microsoft’s revenue in the current 2023 fiscal year. He says Microsoft could clarify things by providing a more granular breakdown.
“To have a more specific disclosure on that would be helpful,” Wood said.
Charles Liang, chief executive officer of Super Micro Computer Inc., during the Computex conference in Taipei, Taiwan, on Wednesday, June 5, 2024. The trade show runs through June 7.
Annabelle Chih | Bloomberg | Getty Images
Super Micro investors continued to rush the exits on Friday, pushing the stock down another 9% and bringing this week’s selloff to 44%, after the data center company lost its second auditor in less than two years.
The company’s shares fell as low as $26.23, wiping out all of the gains for 2024. Shares had peaked at $118.81 in March, at which point they were up more than fourfold for the year. Earlier that month, S&P Dow Jones added the stock to the S&P 500, and Wall Street was rallying around the company’s growth, driven by sales of servers packed with Nvidia’sartificial intelligence processors.
Super Micro’s spectacular collapse since March has wiped out roughly $55 billion in market cap and left the company at risk of being delisted from the Nasdaq. On Wednesday, as the stock was in the midst of its second-worst day ever, Super Micro said it will provide a “business update” regarding its latest quarter on Tuesday, which is Election Day in the U.S.
The company’s recent challenges date back to August, when Super Micro said it would not file its annual report on time with the SEC. Noted short seller Hindenburg Research then disclosed a short position in the company and wrote in a report that it identified “fresh evidence of accounting manipulation.” The Wall Street Journal later reported that the Department of Justice was in the early stages of a probe into the company.
Super Micro disclosed on Wednesday that Ernst & Young had resigned as its accounting firm just 17 months after taking over from Deloitte & Touche. The auditor said it was “unwilling to be associated with the financial statements prepared by management.”
A Super Micro spokesperson told CNBC that the company “disagrees with E&Y’s decision to resign, and we are working diligently to select new auditors.” Super Micro does not expect matters raised by Ernst & Young to “result in any restatements of its quarterly financial results for the fiscal year ended June 30, 2024, or for prior fiscal years,” the representative said.
Analysts at Argus Research on Thursday downgraded the stock in the intermediate term to a hold, citing the Hindenburg note, reports of the Justice Department investigation and the departure of Super Micro’s accounting firm, which the analysts called a “serious matter.” Argus’ fears go beyond accounting irregularities, with the firm suggesting that the company may be doing business with problematic entities.
“The DoJ’s concerns, in our view, may be mainly about related-party transactions and about SMCI products ending up in the hands of sanctioned Russian companies,” the analysts wrote.
In September, the month after announcing its filing delay, Super Micro said it had received a notification from the Nasdaq indicating that its late status meant the company wasn’t in compliance with the exchange’s listing rules. Super Micro said the Nasdaq’s rules allowed the company 60 days to file its report or submit a plan to regain compliance. Based on that timeframe, the deadline would be mid-November.
Though Super Micro hasn’t filed financials with the SEC since May, the company said in an August earnings presentation that revenue more than doubled for a third straight quarter. Analysts expect that, for the fiscal first quarter ended September, revenue jumped more than 200% to $6.45 billion, according to LSEG. That’s up from $2.1 billion a year earlier and $1.9 billion in the same fiscal quarter of 2023.
Peopl walk outside Steve Jobs Theater at the Apple Park campus before Apple’s “It’s Glowtime” event in Cupertino, California, on Sept. 9, 2024.
Nic Coury | AFP | Getty Images
Apple will buy Pixelmator, the creator of image editing apps for Apple’s iPhone and Mac platforms, Pixelmator announced Friday in a blog post.
Pixelmator, a Lithuanian company, was founded in 2007, and in recent years has been best known for Pixelmator and Pixelmator Pro, which compete with Adobe Photoshop. It also makes Photomator, a photo editing app.
Apple has highlighted Pixelmator apps over the years in its keynote product launches. In 2018, Apple named Pixelmator Pro its Mac App of the year, citing the company’s enthusiastic embrace of Apple’s machine learning and artificial intelligence capabilities, such as removing distracting objects from photos or making automated color adjustments.
“We’ve been inspired by Apple since day one, crafting our products with the same razor-sharp focus on design, ease of use, and performance,” Pixelmator said in its blog post.
Apple does not acquire as many large companies as its Silicon Valley rivals. It prefers to make smaller acquisitions of companies with products or people that it can use to create Apple features. Neither Pixelmator nor Apple provided a price for the transaction.
Pixelmator said in its blog post that there “will be no material changes to the Pixelmator Pro, Pixelmator for iOS, and Photomator apps at this time.”
Earlier this week, Apple released the first version of Apple Intelligence, a suite of features that includes photo editing abilities such as Clean Up, which can remove people or objects from photos using AI.
Apple has acquired other popular apps that received accolades at the company’s product launches and awards ceremonies.
In 2020, Apple bought Dark Sky, a weather app that eventually became integrated into Apple’s default weather app. In 2017, it bought Workflow, an automation and macro app that eventually became Shortcuts, the iPhone’s scripting app, as well as the groundwork for a more capable Siri assistant.
Amazon CEO Andy Jassy speaks at the Bloomberg Technology Summit in San Francisco on June 8, 2022.
David Paul Morris | Bloomberg | Getty Images
Amazon shares jumped 7% on Friday and neared an all-time high after the company reported better-than-expected earnings, driven by growth in its cloud computing and advertising businesses.
The stock is up about 32% for the year and touched $200.50 on Friday. Its highest close was $200, a mark the stock hit twice in July.
Revenue increased 11% in the quarter to $158.9 billion, topping the $157.2 billion estimate of analysts surveyed by LSEG. Earnings of $1.43 topped the average analyst estimate of $1.14.
Sales in the Amazon Web Services cloud business increased 19% to $27.4 billion, coming in just shy of analysts’ estimates, according to StreetAccount. That was an acceleration from 12% a year ago, but trailed growth at rivals Microsoft and Google, where cloud revenue increased 33% and 35%, respectively. Microsoft’s Azure number includes other cloud services.
Amazon’s capital expenditures surged 81% year over year to $22.62 billion, as the company continues to invest in data centers and equipment such as Nvidia processors to power artificial intelligence products. Amazon has launched several AI products in its cloud and e-commerce businesses, and it is also expected to announce a new version of its Alexa voice assistant powered by generative AI.
“Amazon has integrated AI into what is the most diverse tech footprint of any mega cap, with multi-billion revenue streams in e-commerce, advertising, subscriptions, online video, and cloud,” analysts at Roth MKM wrote in a note after the earnings report. They have a buy rating on the stock.
Brian Olsavsky, Amazon’s chief financial officer, said on the earnings call that the majority of the company’s 2024 capex spending is to support the growing need for technology infrastructure.
CEO Andy Jassy said the company plans to spend about $75 billion on capex in 2024 and that he suspects the company will spend more next year.
“The increased bumps here are really driven by generative AI,” Jassy said on the call. “It is a really unusually large, maybe once-in-a-lifetime type of opportunity,” he said, noting that shareholders “will feel good about this long term that we’re aggressively pursuing it.”
Advertising was another bright spot. Sales in the unit expanded 19% to $14.3 billion during the quarter, meeting expectations and outpacing growth in Amazon’s core retail business.
Amazon’s ad growth was about in line with Meta, which saw 18.7% expansion, and faster than growth at Google, which reported a 15% increase in ad revenue. Snap‘s sales also jumped 15% from a year earlier.
Amazon forecast revenue in the current quarter to be between $181.5 billion and $188.5 billion, which would represent growth of 7% to 11% year over year. The midpoint of that range, $185 billion, fell short of the average analyst estimate of $186.2 billion, according to LSEG.