Key Points
In the cloud computing arena, three companies dominate: Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). All three of these have thriving cloud computing businesses, and each recently reported results for its latest quarter.
Although the market may have declared a handful of winners, I have a different line of thinking on these three. I think there are two clear winners and one loser in this trio, and the loser may seem odd to pinpoint, considering the stock’s performance following earnings.
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So, where do these three fall? Let’s find out.
Image source: Getty Images.
Cloud computing will be a major long-term winner of AI
One of the biggest questions the market is wrestling with right now is which companies will be the major winners of the artificial intelligence (AI) build-out. In my mind, the cloud computing companies will likely be the ultimate winners. Although they are spending hundreds of billions of dollars on computing capacity right now, all of that and then some will be earned back via cloud computing.
The idea is simple: A company builds excess computing capacity, then rents it out to clients for a profit. All three of these companies have major AI players as clients, and every time they train a new model or someone runs an inquiry in their systems, the cloud computing companies get paid. That business will never go away, making it a great investment for the long term. Right now, these three are rapidly building out their computing capacity to grab as much market share as possible, as this will be their rental base when AI infrastructure is more mature.
Looking at each company’s second-quarter results (fiscal fourth quarter for Microsoft) revealed strength across the board. Amazon Web Services (AWS) grew the slowest of the three, rising at a 37% pace. Microsoft Azure was next at 43% growth. Leading the way was Google Cloud, rising 82% year over year.
From just those figures, it would be easy to declare Amazon the loser, as it’s in last place just from its growth rate. However, I don’t think that’s the right call.
What’s undisputed is that Google Cloud is crushing it and seeing huge growth right now. It is experiencing an enormous influx of computing demand, largely stemming from its custom AI chips, which can deliver cheaper computing costs versus AI training using graphics processing units (GPUs).
But who is the other winner? I’d argue it’s Amazon.
Although Amazon may have grown slow than Microsoft, it’s picking up major momentum. In the first quarter, AWS’ growth rate was 28%. That’s major acceleration, especially considering that AWS is the largest of the three cloud computing companies. Azure’s revenue rose 40% during the third quarter, so the 43% Q4 growth really didn’t build on Q3’s results. If this pattern continues, Amazon could easily surpass Microsoft’s growth rate in the following quarters, making it the more obvious winner.
Because Microsoft’s growth rate barely accelerated, I’m a bit skeptical of the health of its cloud business, as its growth should be rapidly accelerating, not barely picking up. Still, that didn’t stop the market from loving its quarter.
The market prefers Microsoft stock
Heading into earnings, Microsoft stock was beaten down, but it was quickly bought up following the quarterly results.
AMZN data by YCharts. PE = price-to-earnings.
That still doesn’t sway my opinion on which stock had the best results. When you look at valuation heading into earnings, it was clear Microsoft was undervalued, and I think this explains why it had the best reaction after the earnings announcements.
AMZN Operating PE Ratio data by YCharts.
I still think Amazon and Alphabet had the best quarters, but Microsoft could easily join them if it reports rapid cloud growth next quarter. We’ll see what happens in three months, but if this pattern persists, Alphabet and Amazon are far better buys than Microsoft for the long term.
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Keithen Drury has positions in Alphabet, Amazon, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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