When 1% Market Share Shifts Represent $5b of Market Cap

If it wasn’t clear before, AI is the single biggest revenue driver in cloud.

Microsoft’s Azure is winning share directly from Amazon. In Feburary, Microsoft grew 2% & Amazon lost 2%. Google is also taking share - 1% in the last year. A one percentage point share shift represents about $750 million of spend or about $5b in market cap.

“We’re fundamentally a share taker there because if you look at it from our perspective, at this point, Azure has become a port of call for pretty much anybody who is doing an AI project”

“More than 65% of the Fortune 500 now use Azure OpenAI service.”

Much of the AI spend is at the enterprise, where a 50% reduction in customer support cost or a 75% increase in engineering capacity filters billions to the bottom line.

“The number of $100 million-plus Azure deals increased over 80% year-over-year, while the number of $10 million-plus deals more than doubled. "

Copilot growth implies about a $500 million ARR product growing 35% QoQ - tripling annually.

“We now have 1.8 million paid subscribers with growth accelerating to over 35% quarter-over-quarter…more than 90% of the Fortune 100 are now GitHub customers, and revenue accelerated over 45% year-over-year. "

The rest of Azure is still growing in a nice clip of 24% annually. But AI added 7 percentage points or $4b to the revenue, a 31% growth rate for a $4b business means adding $1.2b of revenue in a year.

“7 point lift to Azure growth from AI”

Combined with the Copilot business, Microsoft has roughly $4.5b-5b AI product suite.

This trajectory shows no signs of slowing down. The company is investing $50b of capex this year into additional capacity because AI demand exceeds supply.

“Currently, near-term AI demand is a bit higher than our available capacity…In Azure, we expect Q4 revenue growth to be 30% to 31% in constant currency”

Even more impressive, if illusive to measure, is the cross-selling ability of AI across Microsoft customers. The net dollar retention figures must be world class because Microsoft is largely selling to existing customers. NDRs of 300-400% are not unlikely.

Vector databases :

“So AI projects obviously start with calls to AI models, but they also use a vector database. In fact, Azure Search, which is really used by even ChatGPT, is one of the fastest growing services for us. We have Fabric integration to Azure AI and so – Cosmos DB integration.”

The Fabric data platform :

“Fabric now has over 11,000 paid customers, including leaders in every industry from ABB, EDP, Energy Transfer to Equinor, Foot Locker, ITOCHU and Lumen; and we are seeing increased usage intensity.”

AI in other applications:

30,000 Organizations across every industry have used Copilot Studio to customize Copilot for Microsoft 365 or build their own, up 175% quarter-over-quarter.

There’s mention of more within the transcript, but I think the point comes across.

Within the Google transcripts, One of the more interesting data points is that generated search actually increases search volumes :

Most notably, based on our testing, we are encouraged that we are seeing an increase in search usage among people who use the new AI overviews as well as increased user satisfaction with the results.

Also, the company’s reach across consumers is staggering :

We have 6 products with more than 2 billion monthly users, including 3 billion Android devices. 15 products have 0.5 billion users

AI is accelerating growth in a $75b market, 20 year old market. If these growth rates aren’t a sign of anything to come, the amount of market cap creation in front of us will a garguantuan figure.