Amazon, Alphabet, and Microsoft: 2 Cloud Giants I Am Buying in September and 1 I Am Avoiding

The three largest cloud computing providers are Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), and Microsoft (NASDAQ: MSFT). These three command a massive two-thirds market share combined. However, not every single one of these stocks makes for a smart buy right now.

So, of the three, which two am I buying, and which makes the most sense to steer clear of? Let's take a look.

Image source: Getty Images.

AWS and Google Cloud growth rates are accelerating

The reason the cloud computing giants are thriving right now is due to the incredible AI workload demand. The AI revolution will likely go down in history books as one of the more impactful technologies ever devised, and these three are primed to cash in on it.

Few companies have the computing power necessary to train and run AI models, so they rent computing capacity from one of the three major cloud computing providers. There is far more demand than there is supply, and the three are scrambling to build out as many data centers as possible so they can capture market share. That's why they're spending hundreds of billions of dollars on data centers, and it appears to be paying off.

Amazon Web Services (AWS) holds the largest market share of the three, and is the slowest-growing as a result. In the second quarter, its revenue rose 37% year over year. However, this marks a major acceleration. Last year, AWS' growth rate hovered in the low 20% range, which makes this year's growth rate all the more incredible.

Alphabet's Google Cloud is having the most impressive performance of the three. In Q2, Google Cloud's revenue rose 82% year over year. Its operating margin also rose to 36%, marking a major improvement from years past. Google Cloud is the fastest-growing of the three, and with Alphabet spending around $200 billion on data centers this year, this growth rate will likely stay elevated for some time.

Microsoft Azure is the next fastest-growing cloud business. Azure grew at a 43% pace, but there's one issue I take with it: Its growth rate has hardly changed. Last quarter, it was 40%. The quarter before that, it was 39%. While these are solid growth rates in a vacuum, they look a bit suspicious when compared to its peers that are experiencing accelerating growth rates.

As a result, Microsoft is on my avoid list. Unless it can start reporting meaningful revenue acceleration in its Azure division, AWS and Google Cloud will start to pull away in terms of market share. That gap may be impossible to close in the future.

However, that's not the only reason I'm avoiding Microsoft.

Microsoft's overall profits are growing more slowly

All three of these companies are investing in various rapidly growing AI companies, and that's skewing their net income. As a result, I think looking at their operating income growth is a great measure of how their profits are growing. From this standpoint, Amazon and Alphabet are growing at a far greater rate than Microsoft.

AMZN Operating Income (Quarterly YoY Growth) data by YCharts

This shows that Amazon's and Alphabet's impressive performance in the cloud computing space is leaking over into companywide results, while Microsoft's aren't. If Microsoft doesn't start accelerating its cloud growth, this trend may continue, further expanding the lead that Amazon and Alphabet have as investment options.

Alphabet and Amazon look like far better investments than Microsoft right now. And I won't be surprised to see their stocks outperform over the next few years while Microsoft still enjoys market-beating performance, but just underperforms its competition.

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.