Amazon, Alphabet, and Microsoft All Delivered Soaring Cloud Growth Thanks to AI. Here's the 1 I'd Buy Right Now
Key Points
Each of the major cloud providers reported strong double-digit cloud growth, driven by robust demand for AI.
The hyperscalers are also increasing their capex spending to meet the unprecedented demand.
Only one continues to generate positive free cash flow and is cheaper on a forward-looking basis.
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Over the past year or so, investors haven’t known what to make of artificial intelligence (AI). One the one hand, this next-generation technology has shown great promise for streamlining tasks, simplifying workflows, and generating original content. On the other hand, the veritable spending frenzy raises questions about whether these investments will generate sufficient returns to justify the cost.
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For the calendar second quarter, the world's three largest cloud providers -- namely Amazon (NASDAQ:AMZN) Web Services (AWS), Alphabet's (NASDAQ:GOOGL) (NASDAQ:GOOG) Google Cloud, and Microsoft (NASDAQ:MSFT) Azure -- all reported stunning growth as the demand for AI ramps higher. While the results from each of these tech titans seem to justify the increased investments, one has separated itself from the pack and is the clear choice.
Let's review the results to see which one is an obvious buy.
Image source: Getty Images.
Amazon
As the long-time leader and pioneer in the space, all eyes were on Amazon when the company delivered its second-quarter results, and it did not disappoint. Total net sales grew 20% to $201 billion, while operating income -- which excludes the non-cash gains related to its investment in AI start-up Anthropic -- jumped 44%.
The biggest contributor was AWS, as cloud revenue increased 37% year over year to $42.2 billion, marking the segment's fastest growth in 18 quarters. CEO Andy Jassy noted that the growth was fueled by strong demand for the company's AI and chips businesses, which each delivered triple-digit growth, achieving run rates exceeding $25 billion. Amazon plans to increase its capex spending to $220 billion, primarily for AI and cloud infrastructure.
Microsoft
Despite fears that AI will decimate the software industry, Microsoft delivered robust results for the company's fiscal 2026 fourth quarter (ended June 30). Revenue grew 18% year over year to $90 billion, as the feared software meltdown never materialized. Operating income -- which excludes changes related to its stakes in Anthropic and OpenAI -- climbed 18% to $41 billion.
The company's cloud segment made headlines, as Azure and other cloud services grew 43% year over year. It's also worth noting that in fiscal 2026, Azure revenue surpassed $100 billion for the first time. While Microsoft didn't reveal full-year plans for 2027, it does expect capex spending of $50 billion in Q1.
Alphabet
Like its two main rivals, Alphabet is spending heavily to capture the AI opportunity, and that strategy is paying off. Second quarter revenue grew 24% year over year to $120 billion, while operating income jumped 30% to $41 billion.
Google Cloud was the highlight, with revenue soaring 82% to $25 billion, fueled by demand for AI infrastructure and solutions. CEO Sundar Pichai noted that 90% of Fortune 100 companies use its Gemini Enterprise AI platform. To support the strong demand, Alphabet raised its full-year capex forecast to $200 billion at the midpoint of its guidance.
The clear standout
The results show a clear trend that supports heavy spending on AI, but not all spending is created equal. Amazon reported negative free cash flow of $7.6 billion, driven by higher capex. Alphabet too reported negative free cash flow of $5.8 billion during the quarter, driven by -- you guessed it -- higher capex. Microsoft was the outlier and clear standout. Despite higher spending, the company delivered free cash flow of $19.6 billion. Furthermore, CFO Amy Hood said the company expects "to remain free cash flow positive in fiscal 2027."
There's more. Microsoft is selling for just 21 times next year's expected earnings, compared to multiples of 25 and 26 for Alphabet and Amazon. So not only is the company being more deliberate in its spending -- keeping its cash flow positive -- but it's also the least expensive of the three.
I have stakes in Amazon, Alphabet, and Microsoft, and I think all three are good bets for the future of AI. But if I could only buy one right now, the smart money is on Microsoft stock.
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Danny Vena, CPA 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.
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