Microsoft vs Amazon Stock: Which Is Best?

Microsoft vs Amazon Stock: Though both companies started out in the tech industry, Microsoft and Amazon didn’t have a lot in common when their journeys began. Microsoft built the hardware and software that took desktop computing mainstream, while Amazon created an e-commerce empire.

Both are still invested in their original products and services, but something has changed. Cloud computing has become a massive business, and as two of the leading providers, Microsoft and Amazon are in direct competition.

By many measures, it is cloud computing and not their original products and services that will drive profits for both companies, both short-term and long-term. From an investor’s perspective, that brings up an important question: Microsoft vs Amazon stock – which is best?

Cloud Computing Market Growth Is STILL Huge

What is cloud computing? At its most basic, cloud computing removes the need for individuals and businesses to purchase, install, maintain, and update software onsite or in their own data centers.

IT resources are delivered on-demand over the internet – and that includes software, storage, and computing power. The term “cloud computing” comes from the fact that everything is virtual – or, as it has come to be known, “in the cloud.”

Emerging technologies like machine learning, artificial intelligence (AI), virtual reality (VR), and augmented reality (AR) require tremendous computing resources. Cloud computing makes it possible to access that power on an as-needed basis.

Many businesses have moved their entire IT function to the cloud because it is easier, more convenient, and ultimately, less expensive than traditional processes, and nearly all have adopted cloud computing for at least a portion of those functions.

Of the small percentage that continue to keep their computing onsite, the vast majority say it is only a matter of time before they transition.

In the United States, the cloud computing market was valued at $101.4 billion in 2020 and $135 billion in 2021. From 2022 through 2030, the market’s projected compound annual growth rate (CAGR) is 14.8 percent.

On a global scale, the numbers are even more impressive. The total cloud computing market was valued at $368.97 billion in 2021, and the CAGR is expected to be 15.7 percent through 2030.

At the moment, Amazon Web Services controls approximately a third of the total cloud computing market, while Microsoft Azure is at 21 percent. So, when it comes to Amazon vs Microsoft stock, does that mean Amazon is best?

Is Microsoft Stock A Buy?

The market was pleased with Microsoft’s fiscal third-quarter financial results, which the company announced on April 26, 2022. Microsoft stock price immediately increased upon news that revenue went up 18 percent year-over-year to total $49.4 billion. That exceeded analysts’ projections by a whopping $350 million.

Net income wasn’t quite as successful. It grew eight percent to a total of $16.7 billion. On a per-share basis, net income came in at $2.22 per share, which was $0.25 lower than analysts expected.

However, the real story – and the reason that investors are enthusiastic about Microsoft stock – isn’t about overall revenue and net income. The earnings call and financial results included other promising signs that Microsoft is poised for growth in coming quarters and over the next few years.

First, Microsoft has three divisions, and it isn’t overly reliant on any one. Productivity and Business Processes, More Personal Computing, and Intelligent Cloud each contribute approximately a third of the company’s revenue, which protects shareholders if challenges disrupt any individual unit. In other words, Microsoft’s revenue is well-diversified, which is always a good thing.

Meanwhile, Microsoft’s cloud computing service, Microsoft Azure, is in a solid second position after Amazon Web Services (AWS) – for now. But many Azure clients choose Microsoft over Amazon because the clients themselves are in competition with Amazon.

That factor is likely to drive growth in Azure’s market share on top of the general growth that is expected across cloud computing. For the fiscal third quarter, Microsoft’s cloud-based revenue increased 32 percent year-over-year.

Microsoft’s free cash flow (FCF) went up by 17 percent year-over-year to total $20 billion in the fiscal third quarter. That gives Microsoft the ability to pay a dividend and buy back stock, which increases value for shareholders. The current dividend yield is relatively low at 0.90 percent, but given the growth in FCF, there is plenty of opportunity to increase dividends when the time is right.

Finally, it is worth noting that Microsoft stock is reasonably priced, considering it is tech-based and the second largest company in the United States after Apple. It trades at a relatively low price-to-earnings ratio, which boosts investor confidence when economic conditions are as volatile as they are today.

Will Amazon Stock Go Up?

The pandemic threw Amazon’s e-commerce business into high gear as most consumers chose home delivery over brick-and-mortar shopping. The company’s revenues shot up – and so did its stock price – after the 2020 market crash. Both remained elevated throughout the health crisis.

Amazon’s cloud computing business was also in high demand during the same period, and its impressive margins made a significant contribution to Amazon’s 2021 profits.

That’s all positive, but there is a caveat when it comes to these results. Amazon is having a hard time matching growth year-over-year. In fact, after the April 29, 2022, earnings announcement, Amazon stock dropped 14 percent.

Results weren’t what investors hoped for due to a number of factors, including large investments in delivery infrastructure that will make Amazon’s network virtually unbeatable. The current financial pain is expected to create substantial future growth, so Amazon’s stock price is very likely to go up over time.

Many investors and analysts are taking this opportunity to buy Amazon stock at a relative discount. The general sentiment among experts is that the current Amazon sell-off is short-sighted. Those with long-term goals fully expect Amazon stock to recover and reach new heights.

A discounted cash flow forecast analysis reveals fair value for Amazon is pegged at $3,186 per share, suggesting significant upside from current levels.

Amazon vs Microsoft Stock: Which Is Best?

Both Amazon and Microsoft are solid choices for nearly every portfolio. A lot of investors have elected to include both. However, if that’s not appropriate based on your investment goals, Microsoft has a slight edge.

First, Microsoft has more room to grow its cloud computing business, and that is expected to drive Microsoft’s revenue growth more quickly than Amazon’s in the near term.

Second, Microsoft is more reasonably priced at its current P/E ratio of just over 28. Amazon’s P/E ratio is above 55.

Third, Microsoft pays a reliable dividend with a current yield of 0.90 percent. Amazon doesn’t offer a dividend at this time.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.