Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN) are collecting billions from the AI boom, but investors are paying almost the same multiple for two very different earnings engines. Yahoo Finance’s most recently available valuation snapshots put Microsoft at 25.13 times forward earnings and Amazon at 23.64 times.
That narrow gap begs investor attention because Microsoft’s enterprise software produces enormous profits alongside Azure, while Amazon is using profits from AWS and its retail operations to fund an infrastructure buildout that has pushed free cash flow below zero.
The question investors need to look into is not which cloud provider is growing faster. It is how much of that growth remains available to shareholders after the computers, data centers, and supporting infrastructure have been paid for. In other news, we meticulously compiled a list of the best big name stocks to buy according to financial media, and there are eight stocks other than AMZN and MSFT that rank in that list. Access the complete list for free here.
Bull Case
Microsoft has a compelling answer on profitability. In its June quarter, the company reported that revenue increased 18% to $90.0 billion, while operating income rose 18% to $40.6 billion. Azure and other cloud services revenue grew 43%, and Microsoft Cloud revenue reached $59.3 billion, up 27% year-over-year. The appeal is that Azure’s expansion sits alongside established enterprise products and is not tasked with the responsibility of carrying the company’s entire earnings burden. Read more about what Michael Burry has to say about MSFT stock here.
Amazon.com, Inc. (NASDAQ:AMZN) makes the argument from a different direction. AWS revenue surged 37% to $42.2 billion in the second quarter, reaching a $169 billion annualized revenue run rate and marking its fastest growth in 18 quarters. More importantly, AWS operating income climbed to $16.6 billion from $10.2 billion a year earlier. The cloud division accounted for approximately 60% of Amazon’s total operating income, despite generating only about 21% of its revenue. That outsized contribution to profitability helps explain why AWS’s growth carries considerably more weight in Amazon’s investment case than its share of overall sales suggests. Read more extensively about Amazon’s bull and bear case here.
Amazon’s other operations are not standing still, either. North American segment operating income increased to $9.1 billion from $7.5 billion, even as the company invested across its business. Consolidated operating income grew 43%, faster than its 20% revenue increase. At a slightly lower forward multiple than Microsoft, Amazon is demonstrating real operating leverage and not just promising future AI revenue to investors. There are other big name stocks that financial media favors at the moment. Check here.
Bear Case
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The catch for both companies is the enormous cost of turning demand into capacity. Microsoft’s quarterly cash spending on property and equipment reached $35.8 billion, compared with $17.1 billion a year earlier, which is more than double the prior-year figure. The spending supports Microsoft’s broader infrastructure requirements, not Azure alone, but its scale illustrates how much investment now accompanies cloud expansion.
Amazon’s cash-flow picture is starker. Operating cash flow grew 33% to $161.4 billion over the trailing twelve months, yet free cash flow was negative $7.6 billion, versus positive $18.2 billion a year earlier. Amazon attributed the deterioration primarily to an increase in purchases of property and equipment. AWS is making more money, but the company is simultaneously committing more cash to infrastructure. Employment scrutiny may be becoming another risk for Amazon. Read more extensively here.
Headline net income is another trap. Amazon’s quarterly net income of $62.6 billion included $53.4 billion in pretax non-operating other income, primarily related to Anthropic investments, not recurring operating earnings. Microsoft’s GAAP earnings, similarly, included investment-related effects, which it separately reconciled in its disclosure.
Conclusion
The near-equal forward multiples mask a meaningful difference in what is being valued. Microsoft’s existing software and cloud profits offer an established earnings base, albeit with heavy investment requirements. Amazon’s AWS profitability is accelerating, but its current investment cycle is consuming more cash than operations produce after capital spending.
The central test is which company can translate rising cloud demand into durable earnings and, eventually, cash available to shareholders.
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This article is originally published at Insider Monkey.
