Better Cloud Investment: Amazon or Nebius Group?

Cloud computing is a major part of the artificial intelligence (AI) build-out, and any company involved in selling cloud computing services is a great investment pick. The largest cloud computing provider in the world is Amazon (NASDAQ: AMZN), which offers Amazon Web Services (AWS). AWS is a huge firm, but it's far from the only option.

Neocloud computing is another fast-growing type of cloud computing, and it is purpose-built for AI workloads. One of the primary companies in this industry is Nebius Group (NASDAQ: NBIS), and it's growing at a pace that you have to see to believe.

These two couldn't be further apart, outside of the fact that they're in similar industries. But which makes for a better buy? Let's take a look.

Image source: Getty Images.

How can Nebius compete against a giant?

Amazon's computing resources are vast. It's spending about $220 billion on data centers this year, which is an absolutely incredible figure. That will dramatically increase its available computing capacity, allowing it to increase its customer count and the amount of access existing customers have. This will allow them to extend their rapid growth rate for many quarters, leading to huge growth for Amazon.

One advantage that Amazon has over Nebius is its massive commerce business. The profits from this segment are helping fund its data center build-out, which doesn't require Amazon to take on as much debt.

That's a key difference, as Nebius is having to borrow to grow. Nebius has taken on significant debt to compete in the cloud computing space, but when you see the returns, it's clear that this method is working, at least right now.

NBIS Total Long Term Debt (Quarterly) data by YCharts

Nebius noted that its payback period for deals closed in Q2 was just under two years. That makes taking on a large amount of debt worth it, as it won't be long before it has generated enough revenue and then some to repay debt and reinvest in other areas.

The plan is for Nebius to reach a point where it's self-funding and doesn't have to take on a monster debt load to drive growth, but that's the reality it's in right now. However, given the incredible demand for AI computing power, this strategy makes sense.

But can it keep up with Amazon?

Nebius's clock is ticking

Amazon can spend all this money and capture highly profitable long-term revenue streams. Nebius must grow quickly and for a long enough time frame to eventually create a viable stand-alone business. With the AI boom expected to last at least through 2030, that's not a very long time frame to develop a viable business, so the clock is ticking against Nebius.

However, its growth is simply incredible. During Q2, its revenue rose at a 454% year-over-year pace, easily beating out AWS's 37% growth rate. While AWS posted an impressive 39% operating margin, Nebius posted a 30% negative operating margin.

That showcases just how different a spot these two are in, and should make investors consider which is the better buy.

If you want ultimate upside with higher risk, then Nebius is the better pick. If you want strong growth but less downside, Amazon makes for a better pick. I think both of these stocks will thrive in the current environment for the foreseeable future, and they both make perfect sense to buy.

So, I think a smart move would be to set aside a certain percentage of your portfolio for cloud computing, and invest about 25% in Nebius and the remaining 75% in Amazon. That way, if Nebius pans out, it will still deliver huge returns. But if it doesn't, Amazon's strong return potential will help offset those losses and still provide a market-beating investment.

Keithen Drury has positions in Amazon and Nebius Group. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.