The cloud computing sector’s titanic leaders, Microsoft and Amazon, have emerged from their latest financial quarters in a state of robust growth, buoyed by a voracious corporate appetite for generative artificial intelligence. Yet beneath the spectacular headline earnings, a nuanced picture is emerging—one characterized by both accelerating optimism and growing competition as the AI revolution gathers pace.

Cloud Revenue Surges on AI Demand

Microsoft’s third-quarter results for fiscal 2024, released late April, beat Wall Street’s expectations. The company’s Azure cloud unit, a focal point for its artificial-intelligence ambitions, saw revenue jump 31% compared with the same period a year prior. That growth outpaced the broader intelligent cloud segment, which rose 21% to $26.7 billion—both metrics above analyst forecasts.

Satya Nadella, Microsoft’s chief executive, was unequivocal in his assessment during the company’s earnings call. “We’ve moved from talking about AI to applying AI at scale,” he said, emphasizing the company’s efforts to deploy new AI-generation tools that leverage partners such as OpenAI.

Amazon, meanwhile, reported first-quarter earnings that similarly delighted investors. Amazon Web Services (AWS), its cloud arm, saw revenue rise 17% to $25 billion year-on-year, a reacceleration from 13% growth the prior quarter. Andy Jassy, Amazon’s chief executive, said in prepared remarks the company is “seeing significant momentum” in both foundational AI services and the enabling compute power, with generative AI workloads driving “tens of millions” of dollars in revenue for AWS.

A Rejuvenated Outlook

In both cases, the resurgence of cloud growth marks a notable turnaround from last year, when inflation and economic jitters had prompted many corporations to scrutinize and temper their spending on cloud infrastructure. Correspondingly, in early 2023 many analysts questioned whether the pandemic-fueled surge in cloud adoption had plateaued. The latest quarters have put much of that skepticism to rest.

Microsoft and Amazon, together accounting for well over half of the global cloud market, are now seen as primary enablers of the next AI-driven transformation. “Big cloud providers are increasingly key to delivering AI across industries,” said Anurag Rana, senior analyst at Bloomberg Intelligence, in a research note. Investors have taken note: Microsoft’s shares rose to new all-time highs after earnings, and Amazon’s stock rallied sharply in after-hours trading.

Intensifying Rivalry and Smaller Contenders

Despite their dominance, both Microsoft and Amazon find themselves facing intensifying rivalries—not only with each other but from third-place Google Cloud and a host of smaller but ambitious competitors. Alphabet reported that Google Cloud revenue grew 28% to $9.6 billion in its most recent quarter, suggesting the market remains in expansion mode.

All three giants are racing to launch and host large language models, develop proprietary AI-powered services, and win lucrative contracts from both startups building AI-native applications and large corporations experimenting with generative AI. Microsoft, through its deep partnership with OpenAI, has sought to infuse generative AI into both cloud infrastructure and everyday tools like Office and Dynamics. Amazon has countered with Bedrock, its offering that supports not only its own foundational models but also those of Anthropic, AI21 Labs, and Stability AI.

Profit Margins and Long-Term Bets

The new AI workloads are, for now, poised to further fatten cloud margins. Running state-of-the-art large language models for enterprise customers often requires more intensive—and expensive—computing resources than traditional cloud operations such as storage or basic web hosting.

However, executives at both companies have floated notes of caution regarding the cost and scale of this new business. Capital expenditure is rising steeply, as both companies invest billions in new data center infrastructure and, crucially, in specialized chips and graphics processing units tailor-made for the AI era.

Amazon’s Jassy, when asked by analysts about profitability, described AI as a “generational opportunity” but said, “It’s still early days in generative AI.” Microsoft, meanwhile, told investors it expects aggressive spending to continue in pursuit of cloud and AI growth.

The Road Ahead

With generative AI now seen as a secular growth engine for the cloud industry, the next chapter will revolve around execution—turning pilot projects into repeatable enterprise sales, managing infrastructure scale, and defending margins in an increasingly competitive market. For now, at least, the intertwined fortunes of cloud’s two heavyweights are rising on a tide of AI-fueled demand, even as the waters remain choppy with complexity and risk.