In the third quarter, Google's cloud outperformed its competitors, as the AI competition intensified.

• In the most recent quarter, Google's cloud business experienced a 35% increase, surpassing the growth rates of larger competitors Amazon and Microsoft.
• In the quarter, Amazon Web Services generated a 38% operating margin, resulting in continued profit.
• The demand for artificial intelligence services is exceeding the supply provided by both Amazon and Microsoft.

This week, Wall Street's focus on cloud computing has intensified, with the company outperforming its competitors in growth. This is a positive sign for investors, indicating that the internet company is gaining momentum in the field of artificial intelligence.

In the third quarter, the cloud business, encompassing both infrastructure and software subscriptions, experienced a 35% year-over-year growth, quickening from the 29% increase in the previous period.

Azure and other cloud services from Microsoft grew 33% from a year earlier, while Web Services, the market leader, grew 19% to $27.45 billion, which is more than twice the size of Google Cloud but expanding about half as quickly.

This week, five out of the six trillion-dollar tech companies released their results, except for AI chipmaker. The simultaneous reporting of Amazon, Alphabet, and Microsoft provides investors with insights into the ongoing cloud wars.

Analysts at Argus Research recommend buying Alphabet stock, stating that the company's rapid growth in Google Cloud has begun to diversify its revenue, despite criticism for its dependence on digital advertising.

Google's cloud services are no longer a financial drain.

In the third quarter, Google reported a 17% cloud operating margin, surpassing expectations after turning a profit last year. According to Melissa Otto, head of technology, media and telecommunications sector research at Visible Alpha, who spoke on CNBC this week, the company's profitability is impressive, but she is unsure if it can be sustained at this level.

For many years, Amazon has relied heavily on AWS for the majority of its profits.

AWS' operating margin for the third quarter was 38%, which analysts at Bernstein described as a "whopping" number. Executives have been careful with hiring and have discontinued less popular AWS services. Additionally, at the beginning of 2024, Amazon extended the useful life of its servers from five years to six, a change that boosted the operating margin by 200 basis points, or 2 percentage points.

This week, Azure public cloud is providing investors with more accurate readings, excluding sales of mobility and security services and Power BI data analytics software. Microsoft, as the lead investor in OpenAI creator ChatGPT, is benefiting significantly from AI services.

Microsoft's finance chief, Amy Hood, stated on the company's earnings call that the demand remains higher than the available capacity.

Azure growth will moderate in the current quarter, but it should pick up in the first half of 2025 as capital investments increase AI capacity to meet growing demand.

Amazon is seeing a similar dynamic.

According to Amazon CEO Andy Jassy, on the company's earnings call, most people today have more demand than capacity, and the main area where companies could benefit from more supply is in chips.

Amazon utilizes its own processors as well as Nvidia's GPUs to reduce the load. Jassy stated that clients are expressing interest in Trainium 2, Amazon's second-generation chip for model training.

He stated that they returned to their manufacturing partners several times to produce more than what was initially planned.

Sundar Pichai, CEO of Google, has been spending time with the team responsible for the sixth generation of custom tensor processing units for AI.

He expressed his excitement about the future-oriented roadmap, stating that it enables us to plan ahead and optimize our architecture for it.

Microsoft unveiled its AI chip, Maia, a year ago and has been using it to power its own services. However, the chip is not yet available for customers to rent out, a spokesperson stated.

Microsoft may not be able to win the battle against Amazon and Google, according to analysts at DA Davidson, who have a neutral rating on the company.

In the upcoming quarter, which is generally ranked fourth among U.S. cloud infrastructure companies, is predicted to release its results. In its previous report, the company reported a 45% increase in cloud infrastructure revenue, up from the 42% growth recorded in the prior quarter.

Oracle has partnered with its three major cloud competitors to offer its databases on their services, a move that Chairman Larry Ellison stated during the last earnings calls would significantly boost the growth of the company's database business for years to come.

The scale of Alphabet's cloud business and AI infrastructure spending will be crucial.