The Better AI Cloud Stock: Microsoft or Amazon?

The biggest question hanging over the AI boom is whether the enormous sums invested in it will yield a return. For the two companies that dominate cloud computing, the payoff shows up in their cloud divisions.

Microsoft (NASDAQ: MSFT) runs Azure, and Amazon (NASDAQ: AMZN) runs Amazon Web Services (AWS) -- the two biggest sellers of rented computing power and the platforms turning artificial intelligence (AI) demand into revenue. Together, they plan to spend close to $400 billion on capital expenditures this year, much of it on AI data centers.

Both stocks have lagged the market this year, with Microsoft among the megacaps' biggest laggards, down about 19% year to date as of this writing. Is it the better buy? Or should investors bet on the better-performing stock of the two: Amazon?

Image source: Getty Images.

Microsoft: Azure stays out front on growth

The case for Microsoft starts with a single number. In its fiscal third quarter of 2026 (the period ended March 31, 2026), Azure and other cloud services revenue grew 40% year over year, edging up from 39% the prior quarter. That keeps Azure ahead of AWS, which has a slower growth rate.

Additionally, Microsoft's overall cloud business, as Microsoft defines it, goes well beyond Azure. Total Microsoft cloud revenue reached $54.5 billion, up 29%, and the company's AI business passed a $37 billion annual run rate, up 123%. And commercial remaining performance obligations (revenue under contract but not delivered) climbed 99% year over year to $627 billion.

Further, profitability arguably sets the software giant apart. Even with heavy AI spending, its operating margin reached 46.3% in the fiscal third quarter, up from 45.7% a year earlier. And it impressively returned $10.2 billion through dividends and buybacks during the period.

Of course, there's a spending story behind the software giant's cloud growth. Microsoft expects to spend about $190 billion on capital expenditures this year -- up 61%, and its gross margin has narrowed as data-center depreciation mounts. Its deal with OpenAI also changed in April, leaving Microsoft's access to OpenAI's technology no longer exclusive.

At about 23 times earnings, Microsoft's valuation looks attractive next to its underlying business growth. Indeed, on the company's fiscal third-quarter earnings call, chief financial officer Amy Hood said Microsoft expects Azure growth to show "modest acceleration in the second half of the calendar year compared with the first half."

Amazon: AWS reaccelerates, with more behind it

Amazon's cloud growth is slower, but it has shown a more meaningful acceleration in recent quarters. AWS revenue rose 28% year over year in the first quarter of 2026, the fastest growth in 15 quarters and an acceleration from 24% in the fourth quarter of 2025 and 20% in the third.

"It is very unusual for a business to grow this fast on a base this large, and the last time we saw growth at this clip, AWS was roughly half the size," said Amazon CEO Andy Jassy on the company's first-quarter earnings call.

AWS is where Amazon makes most of its money. It produced $14.2 billion in operating income in Q1 -- close to 60% of total operating profit on about a fifth of revenue, at a margin near 38%.

Further, Amazon's retail business looks solid, with North America sales up 12% in Q1. And advertising revenue has topped $70 billion over the trailing 12 months.

Notably, AWS's signed-contract backlog reached $364 billion, even before including a recent Anthropic deal worth more than $100 billion. But Amazon's spending to support its cloud computing growth story is just as aggressive as Microsoft's. The company expects capital expenditures to total about $200 billion this year. And its free cash flow has dropped to about $1 billion over the past year, from nearly $26 billion.

And when it comes to valuation, Amazon is easily the more expensive stock. Its price-to-earnings ratio sits at about 29 as of this writing.

Which is the better AI cloud stock?

If I had to choose between these two stocks today, I'd lean toward Microsoft after its stock's recent severe pullback. The software giant's Azure is growing faster than AWS, yet the stock trades at a lower price-to-earnings ratio. Add in an operating margin near 46% and a dividend, and the company returns more profit and more cash per dollar invested to shareholders.

Of course, Amazon isn't bad in its own right. AWS is reaccelerating, its cloud margins are strong, and its retail and advertising arms are growth engines Microsoft lacks. Further, both of these stocks face substantial risks. Microsoft's margins are under pressure, and its OpenAI edge has eroded some, while Amazon's free cash flow has nearly vanished. Further, both companies will need to demonstrate to investors an attractive return on invested capital from their AI spending in the coming years.

What would change my view? If AWS keeps closing the growth gap with Azure while Microsoft's margins slip, the case could flip quickly.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool has a disclosure policy.