Best cloud stock: Microsoft vs. Amazon

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Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN) own the two largest cloud infrastructure platforms in the world.

Amazon Web Services (AWS) controlled 32% of this market in the third quarter of 2021, according to Canalys. Microsoft’s Azure ranked second with a 21% share, while all other players had single-digit shares.

This dominance makes Amazon and Microsoft two of the major players in the global cloud computing market, which Grand View Research says will grow at a compound annual growth rate (CAGR) of 19.1% between 2021 and 2028. But what technology giant is the best cloud play, as well as the stronger overall investment?

Image source: Getty Images.

The differences between Microsoft and Amazon

Microsoft and Amazon started out in very different places. Microsoft had traditionally generated most of its revenue from on-premise software before Satya Nadella, who took over as the company’s third CEO in 2014, embraced a ‘mobile first, cloud first’ mantra and Aggressively extends Azure, Office 365, Dynamics and its other cloud-based services.

Under Nadella, Microsoft’s annualized marketed revenue grew from just 14% of its revenue in fiscal 2016 to 41% in fiscal 2021. Microsoft leveraged the strength of its on-premises software business to link more businesses, especially retailers that were competing with Amazon and didn’t I don’t want to support AWS – to its cloud services.

Amazon, which still generates most of its revenue from its online marketplaces, launched AWS in 2002. However, it only started showing revenue and operating profit from AWS until 2015. It was then that investors realized that AWS was generating much higher margin income than its retail business. Business.

Last year, AWS generated just 12% of Amazon’s revenue but raked in 59% of its operating profit. AWS’s higher margin business allows Amazon to expand its retail segment and Prime ecosystem with lower margin strategies, arguably the foundation for all of its business.

That’s why Jeff Bezos, who stepped down as CEO earlier this year, handed over the reins to Andy Jassy, ​​the former head of AWS.

Which tech giant is growing faster?

The pandemic has generated headwinds for Microsoft while stoking some tailwinds for Amazon. For Microsoft, the pandemic has slowed the growth of its business software business as large companies shut down. However, it partially made up for this slowdown with the expansion of its cloud, Surface, and Xbox gaming businesses as more people worked remotely and stayed at home.

But for Amazon, the pandemic has boosted its online sales while generating strong demand for its cloud-based services. His expenses increased as he spent billions of dollars on COVID-19-related security measures, but surging revenues easily offset this temporary pressure on his operating margins.

Microsoft is expected to generate more stable growth in a post-pandemic market than Amazon because its growth has not been pushed too far forward. However, Amazon will likely face much more difficult year-over-year comparisons:

Income Growth (YOY)

Previous exercice

Current exercise

next exercise

Amazon

38%

22%

18%

Microsoft

18%

17%

14%

Source: Amazon, Microsoft, Yahoo Finance, December 22. YOY = Year after year. FY = Fiscal year.

In terms of profits, Microsoft should also experience a softer landing than Amazon:

BPA Growth (YOY)

Previous exercice

Current exercise

Next exercise

Amazon

82%

(2%)

26%

Microsoft

38%

14%

14%

Source: Amazon, Microsoft, Yahoo Finance, December 22.

This is because Amazon is once again increasing its investments (especially in digital media) as its revenue growth slows. Meanwhile, Microsoft has already rolled out its biggest “mobile first, cloud first” investments in previous years – and it won’t see a significant increase in spending next year.

What do the reviews say?

Neither stock can be considered cheap relative to its short-term growth. Amazon is trading at 54 times futures earnings, while Microsoft has a forward price-to-earnings ratio of less than 37.

However, bulls will say that both companies deserve to trade at higher valuations as they are well insulated from inflation. Amazon’s e-commerce business could attract bargain hunters as retail prices rise, and both companies’ cloud platforms should easily retain their pricing power as the cloud market grows. .

The winner: Microsoft

Microsoft is arguably a better cloud stock than Amazon, for three simple reasons: Azure is growing much faster than AWS, it’s an attractive option for Amazon’s competitors, and its cloud services are closely tied to Windows, Office, Dynamics and its other software platforms. .

Microsoft is also a better investment overall because it is better diversified, it faces easier post-pandemic comparisons, and its stock is cheaper. Both stocks remain strong long-term investments, but I’m much more confident in Microsoft’s short- to medium-term growth potential.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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