Google Cloud Growth Signals AI Market Expansion

By Deborah Mary Sophia

(Reuters) – Google-parent Alphabet (NASDAQ:GOOGL)'s breakout cloud sales in the July-September quarter bode well for top cloud providers Microsoft (NASDAQ:MSFT) and Amazon.com (NASDAQ:AMZN), signaling that the 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, marking the fastest growth rate in eight quarters. Analysts had expected a 29% rise, according to LSEG.

The mainstay ad sales business also rose by 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 to be the best of the three this quarter."

Google's cloud business is smaller than its competitors, accounting for 13% of its total third-quarter sales, up from 11% a year earlier.

For Amazon, its cloud business AWS contributed 18% of its revenue in the April-June quarter, while Microsoft's Intelligent Cloud unit, which includes Azure, accounted for 44% of 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 marks the fourth consecutive quarter of growth reaccelerating in Google Cloud, having seen a slowdown for several previous quarters. Alphabet attributed the previous slowing to "customer optimization efforts."

Despite having less AI capacity than its peers, Google Cloud has managed to differentiate itself through its powerful Tensor Processing Units, a custom chip for AI, and enhanced security measures, attracting new customers, according to M Science analyst Charles Rogers (NYSE:ROG).

Like its rivals, Alphabet has been investing heavily in AI, aiming to bolster its Search business to compete with Microsoft-backed OpenAI. The company also plans significant investments in its cloud operations, including billions to establish new data centers globally.

Google has integrated its generative AI chatbot Gemini into its cloud, offering customers features like AI-driven code generation, data processing, and insights on cybersecurity threat risks.

These investments are yielding results, with customers increasing their spending on AI services, including the Vertex (NASDAQ:VRTX) AI platform, which allows enterprises to use and develop custom AI models.

Alphabet's new finance head Anat Ashkenazi, who succeeded Ruth Porat, stated that the company's capital expenditures in 2025 would exceed those of 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."