FILE PHOTO: The logo for Google LLC is seen at the Google Store Chelsea in Manhattan, New York City, New York, U.S., November 17, 2021. REUTERS/Andrew Kelly/File Photo
(Reuters) - Google-parent Alphabet's breakout cloud sales in the July-September quarter bode well for top cloud providers Microsoft and Amazon.com, and signal that market for AI-aided computing power is only growing.
The company's stock rose 5.5% in premarket trading on Wednesday, a day after Alphabet posted a 35% surge in Google Cloud revenue, the fastest pace of growth in eight quarters. Analysts expected a 29% rise, according to LSEG.
The company's mainstay ad sales business rose 10%.
"When you see (Microsoft, Amazon) report this week, Google is probably going to have the most impressive cloud growth numbers out there," said Angelo Zino, senior equity analyst at CFRA Research. "It's probably going be the best of the three this quarter."
Google's cloud business is much smaller than the other two, and accounted for 13% of its total third-quarter sales. A year earlier, it accounted for 11%.
For Amazon, its cloud business AWS accounted for 18% of its revenue in the April-June quarter and Microsoft's Intelligent Cloud unit that houses Azure contributed 44% to overall revenue.
"The continued growth of the Google Cloud business this quarter clearly reflects the company's capabilities in AI being recognized as a key driver in organizations choosing to work with Google," said Bob O'Donnell, president and chief analyst at TECHnalysis Research.
This is the fourth straight quarter of growth reaccelerating in Google Cloud. The pace of growth had slowed for several quarters until the third quarter of 2023, which Alphabet at the time blaming "customer optimization efforts."
While Google Cloud has less AI capacity than its peers, the company's focus on its powerful Tensor Processing Units - its custom chip for AI - and improved security has helped it differentiate itself from Azure and AWS, helping attract customers, said M Science analyst Charles Rogers.
Like its rivals, Alphabet has been spending heavily on AI.
Part of that is boosting its Search business to be a more capable competitor to Microsoft-backed OpenAI. It is also investing heavily in its cloud business, announcing plans to spend billions to open data centers across the world.
Google has also integrated its generative AI chatbot Gemini into its cloud, bringing customers features ranging from AI-driven code generation, to data processing, and intelligence on cybersecurity threat risk.
These investments are paying off. Customers have increased their spending on its AI services, including the Vertex AI platform that allows businesses to use the company's models as well as develop their own custom models.
The company's new finance boss Anat Ashkenazi, who took over from Ruth Porat, said Alphabet's capital expenditures in 2025 would be higher than this year.
"The Google Cloud business significantly exceeded expectations with meaningful acceleration and margin expansion," said Gil Luria, head of technology research at D.A. Davidson. "This has been the main area where Google has been able to translate its AI capabilities into revenue growth."
(Reporting by Deborah Sophia in Bengaluru; Additional reporting by Kenrick Cai in San Francisco; Editing by Sayantani Ghosh and Mrigank Dhaniwala)
