Alphabet's Earnings Preview: A Glimpse into the AI Revolution

The Impact of AI on Major Cloud Providers

The growing influence of artificial intelligence (AI) is expected to bring significant benefits to the leading cloud-computing providers during this earnings season. Investors are closely watching for signs that AI is delivering tangible financial returns. According to Ted Mortonson, managing director and technology-desk-sector strategist at Baird, companies like Alphabet Inc., Amazon.com Inc., and Microsoft Corp. are well-positioned to meet or exceed expectations for their cloud businesses when they release results for the June quarter.

Mortonson highlighted that over the past two quarters, there has been a surge in demand for agentic AI, which refers to AI systems capable of making decisions and taking action. This trend is likely to benefit all major cloud providers, not just in the current quarter but throughout the year as well.

Key Expectations for the Three Major Players

Alphabet will be the first among Big Tech to report its second-quarter results, with Google Cloud’s performance being particularly important as investors remain concerned about the risks facing the company’s core search engine business. While there are worries about potential disruptions from AI chatbots or even Google’s own AI responses appearing at the top of search pages, the company stands to gain significantly from AI as a driver of cloud growth.

Analysts expect Alphabet to generate $13.1 billion in Google Cloud revenue, representing a 26.8% increase from the previous year. However, Morningstar analyst Malik Ahmed Khan anticipates a growth rate of 28%. In the first quarter, Google Cloud revenue grew by 28.1%, and anything above 28% would indicate an acceleration in growth, according to Khan. Even if the growth rate doesn’t pick up this quarter, he expects an acceleration in the back half of 2025 as more capacity comes online and demand remains strong.

Google has also secured notable deals for its cloud business, including contracts with Salesforce Inc. These agreements allow users to build agents using Gemini and deploy Salesforce on Google Cloud.

Microsoft's Outlook and Strategic Moves

Microsoft, which will report its fiscal fourth-quarter earnings on July 30, has set a guidance range of 34% to 35% year-over-year revenue growth for Azure. However, Morningstar senior analyst Dan Romanoff notes that investors will be looking for any result above 35%.

Jed Ellerbroek, portfolio manager at Argent Capital Management, points out that Azure benefits from its relationship with OpenAI. Not only is OpenAI popular among everyday users, but it also offers enterprise solutions adopted by major firms. Additionally, ChatGPT recently introduced agent tools that allow the chatbot to handle requests and tasks on a computer.

Mortonson observed that demand for Azure had already been increasing due to the rise in agentic AI use cases. In the December quarter, the company struggled to meet this demand, and Wall Street now expects revenue growth of 35% or more for the cloud segment. Microsoft’s earnings report will also provide early insights into generative AI spending and expected demand, which are key concerns for institutional investors.

Amazon's Performance and Challenges

Amazon, which will release its second-quarter earnings on July 31, is expected to see just under 17% year-over-year sales growth for its cloud segment. This outlook is similar to the previous quarter, where AWS sales grew by 16.9%. Jed Ellerbroek explains that AWS, being the largest player in terms of market share, is likely to experience slower revenue growth compared to its peers.

Supply constraints on Nvidia Corp.'s AI chips have been a challenge for cloud providers, with AWS being particularly affected because it was slow to adopt Nvidia’s chips after initially favoring its own. Ellerbroek expects AWS to see revenue growth of 18% to 19% this quarter, with stronger growth anticipated in later quarters as more chips become available.

Amazon is also investing heavily in agentic AI. The company recently announced an additional $100 million investment in Amazon Bedrock AgentCore, which provides access to AI agents. AWS Marketplace has also integrated AI agents into its platform, enabling customers to choose prebuilt agents from third-party providers for tasks such as optimizing sales and customer service.

Investor Focus on AI Adoption Trends

Investors are keen to understand how much of the cloud demand is driven by training AI models versus companies adopting AI. Demand from the latter indicates broader AI adoption, which is crucial for investor confidence. Eric Compton, a director of equity research for technology at Morningstar, emphasizes that while specific data on this trend may not always be readily available, investors can gauge it through management commentary.