Amazon, Alphabet, and Microsoft: Two I'm Buying and One I'm Selling

Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) are generally recognized as the big three hyperscalers. These three also operate the leading cloud computing platforms, which are a huge part of the AI build-out. Most companies don't have computing capacity available to run AI workloads, so they rent computing power from these three. There isn't enough capacity available, so this trio is spending hundreds of billions of dollars on data center capital expenditures this year and is likely to do the same in 2027. That will lead to monster growth for these companies, but are they all solid buys right now?

Of the three, there are two that I think are smart buys, while one is the odd stock out. Which one is the one to avoid? Let's find out.

Image source: Getty Images.

One stands out with a faster growth rate

All three of these companies are fairly similar: They have a primary business but also a booming cloud computing segment. Amazon has its commerce business, Microsoft has a business software product lineup, and Alphabet has the Google Search empire. All three of these businesses generate significant cash flows, allowing them to invest in cloud computing, which requires heavy upfront investment but then enables massive cash generation in the future.

When it comes to growth rates, Alphabet is by far the fastest-growing. In Q2, Google Cloud's revenue increased 82% year over year. It's also doing it profitably, as its operating margin rose from 21% to 36% over the year. It's hard to pick apart those results, and Google Cloud is by far the fastest-growing. But it's also accelerating. Its growth rate in Q1 was 63%. With more computing capacity coming online, don't be surprised to see this growth rate cross triple digits over the next few quarters.

Amazon Web Services (AWS) and Microsoft Azure are closer in their growth rates, but there is one glaring defect in Microsoft's results that makes me question its strength. AWS' growth rate in Q2 was 37% versus Azure's 43%. However, in Q1, AWS' growth rate was 28% versus Azure's 40%. Why is that a big deal? Well, AWS' growth rate is rapidly accelerating (similar to Google Cloud's), while Azure's is staying fairly stagnant.

This could be a one-off quarterly issue, and if Microsoft reports rapidly accelerating Azure revenue next quarter, it could solve the problem. But if Azure continues its 40% or so growth rate while its peers are experiencing accelerating growth, it could be a red flag that Microsoft isn't capturing as much market opportunity as possible in one of the biggest technological arms races we've ever seen.

As a result, I prefer the other two to Microsoft right now, but is there also a valuation component to be aware of?

Valuing these three isn't straightforward

Each of these companies has invested billions into up-and-coming AI companies, which skews their earnings-per-share (EPS) metric, which affects their price-to-earnings (P/E) ratios. As a result, valuing the stocks based on operating income makes the most sense.

AMZN Operating PE Ratio data by YCharts

From this standpoint, Microsoft is by far the cheapest. This could be the market adjusting for the discrepancy seen in Azure versus the other cloud computing providers. If it is, then the market may have priced the stock correctly to account for AWS' and Google Cloud's rapid acceleration.

However, I'm still picking Amazon and Alphabet over Microsoft despite a cheaper price tag due to their growth acceleration. I think grabbing market share is a better long-term setup than a lower price now, and that makes them top AI stocks to buy and hold over the next few years as the AI arms race ramps up.

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.