Amazon (AMZN) and Microsoft (MSFT): Which is the Better Buy for 2026?

TradingKey - If you want to make money from the AI craze, tech giants like Amazon (AMZN) and Microsoft (MSFT) are great bets since they're building the backbone of the industry. But between the two, which one is actually the better deal for your money?

Amazon: Not Just E-commerce

If you think Amazon is primarily an e-commerce company, think again. In Q3, the company grew net sales 13% YoY to $180.2B, with operating income of $17.4B. AWS, Amazon's cloud computing biz, contributed a whopping $11.4B of that operating income.

More importantly, this profitable cloud business is accelerating. AWS Q3 revenue grew 20% YoY to $33B, a significant uptick from Amazon's Q2 AWS growth rate of 17.5%. And things are looking up further. Apart from e-commerce, Amazon has another fast-growing profit lever - advertising. The company's Q3 ad services revenue grew 24% YoY.

But free cash flow is moving in the wrong direction. Amazon's TTM operating cash flow rose to $130.7B in Q3, however, free cash flow dropped from $47.7B to $14.8B as capital expenditures rose. 

Microsoft: A Rapidly Growing AI Giant

Microsoft is ahead of Amazon in the race, with the better overall business growth rate. The software giant’s revenue rose 18% YoY to $77.7B, and operating profits increased 24% to $38B. 

Like Amazon, Microsoft's cloud business is a key growth driver. For instance, Microsoft Cloud revenue increased 26% YoY to $49.1B. However, Microsoft's cloud biz is much more than just cloud - it includes Microsoft 365, Commercial Cloud, Azure, Dynamics 365, Commercial LinkedIn revenue, and more. Still, Azure remains the key driver of Microsoft's overall cloud revenue. The company's Q1 FY2026 "Azure and other cloud services" revenue increased 40% YoY.

Unsurprisingly, Microsoft, like Amazon, is investing heavily in AI cloud computing. The company is not only seeing growing demand for AI compute from Azure customers but also integrating AI across its products and services.

Amazon vs Microsoft: Which Should You Buy?

The tech titan tussle lives on as investors eye Amazon versus Microsoft. Both are very compelling but let's look at a couple of reasons why Amazon is the better place to be now as we move toward 2026. 

Cloud Battle: Microsoft Wins on Growth, Amazon Wins on In-House Chips

Microsoft’s growth was undeniable. But when it comes to cloud infrastructure, there is no contest: Amazon’s AWS is by far the leader. This gives Amazon the ability to be more aggressive about investment risk with potentially lower downside for shareholders. 

Moreover, Amazon's early focus on developing in-house chips like Trainium could give AWS a long-term advantage in profit margin as NVIDIA chip costs rise. Whoever can take back chip pricing power and let customers run models at lower costs, wins. 

Microsoft's growth, impressive as it is, largely rides on "reselling" OpenAI models and strong pull from Copilot subscriptions. While application-driven growth is fast, it relies heavily on NVIDIA hardware supply, risking bottlenecks. 

CapEx Strategies: Amazon Bets on Scale While Microsoft Focuses on AI Monetization

Both giants have high capex, but Amazon's 2025 spend is expected to surpass Microsoft's. Why? Beyond AWS data centers, Amazon must maintain its global logistics and warehouse automation systems. 

Microsoft focuses mainly on cloud infrastructure and AI chip R&D. But there's a catch. Microsoft's spend centers on shorter-lifecycle AI servers, setting it up for huge depreciation expenses from 2026. If Copilot subscription growth can't outpace depreciation, Microsoft could see a major profit margin squeeze. 

Amazon faces depreciation pressures too with its NVIDIA reliance. But its expanding in-house chip deployment, at far lower costs than GPUs, somewhat eases this. Plus, even after depreciation, its top-tier custom chips can be redeployed to retail recommendations, Alexa voice processing or ad optimization, minimizing losses. 

A portion of Amazon's spend goes to logistics infrastructure which is tapering off and could yield revenue faster. 

Amazon Wins the Valuation Battle Against Microsoft

Amazon stock currently trades at a slightly lower P/E (28x) than Microsoft (31x). And Amazon's retail profit margins still have room to expand with logistics automation. Microsoft's valuation, however, already bakes in sky-high market expectations. If AI efficiency gains underwhelm, Microsoft faces greater valuation damage risk. Score one for Amazon on the valuation front. 

Is 2026 the Year to Buy Amazon Stock?

Based on our analysis, Amazon looks like the better buy. But is 2026 the right time to jump in? 

With $125B in capex support through 2025, AWS capacity constraints should start easing by 2026. The company is expected to report that its AWS revenues will grow more than 30% in 2026, compared with 20% in Q3 of 2025. At AWS re:Invent 2025, Amazon introduced its new Trainium3 AI chips, with partial deployment underway. This could boost AWS margins. 

On the ads front, Amazon projects breaking the $80-85B revenue mark in 2026. This high-margin income can offset some of its hefty capex. 

Given these tailwinds, Amazon looks poised for a breakout 2026. With its attractive P/E, the window to buy Amazon stock is open. 

Just remember, while Amazon's risks may be relatively lower than Microsoft's, it's still a high-risk tech play. Investors should watch for capex overload and competitive threats from other giants. As always, portfolio balance is key. ​