Amazon, Alphabet, and Microsoft: Which 2 to Buy and Which 1 to Avoid

Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), and Microsoft (NASDAQ: MSFT) are all synonymous with the cutting edge of tech, and all have helped lead the way in the artificial intelligence (AI) trend. Consequently, they now incorporate AI in nearly every part of their businesses.

Amazon and Microsoft are the leaders in the cloud infrastructure space, with market shares of 28% and 20%, respectively, and their roles in cloud computing make them prominent in the AI field. By contrast, Alphabet (No. 3, with a 15% share) was an AI software pioneer and now leads the way with its Google Gemini AI engine and in autonomous driving through its Waymo subsidiary, which could meaningfully contribute to Alphabet's financials as soon as 2027.

However, only two of these stocks look like promising buys now. Investors should probably consider adding Amazon and Alphabet shares to their portfolios, but they should refrain from picking up Microsoft now. Here's why.

Image source: Getty Images.

The staggering cost of AI

Admittedly, all three may appear to be stocks to avoid when considering their capital expenditures. Amazon is on course to lay out $220 billion on capex in 2026 alone, and it recently raised its forecast by $20 billion due to rising memory prices. Alphabet is not far behind, with a $195 billion to $205 billion spending plan.

Considering that Microsoft allocated $175 billion for the same purpose, these three companies should account for almost $500 billion in capex this year.

These companies are among the wealthiest publicly traded companies in terms of liquidity. Nonetheless, they have each taken out tens of billions of dollars in loans to finance their AI infrastructure build-outs. Such an act would have seemed inconceivable a year ago, and assuming the spending does not bring the desired returns, even tech heavyweights like these three could face significant pain.

The cases for and against these companies

Fortunately, all these companies have benefited from accelerating revenue growth amid their investments. Thus, they have received early signs that these investments are paying off, likely prompting them to increase capex further.

Still, Alphabet and Amazon have powerful AI platforms, and both have developed their own silicon and foundation models to further their AI advancement. Alphabet has even managed to induce Apple to adopt its foundation models to power Apple Intelligence, so it may hold an advantage.

The Google parent has also maintained one attribute the other two hyperscalers have lost -- positive free cash flow. Despite its high capex, Alphabet generated $53 billion in free cash flow in the second quarter. This almost ensures that it can afford to keep making these investments.

Additionally, Alphabet is cheap, trading at a P/E ratio of just 17. That low valuation suggests room for growth and reduces its downside risk if its capex investments do not pan out.

Amazon is in nearly as strong a position. Its P/E ratio is 20, a level that would have been unthinkable a few years ago when investors bought its stock at P/E ratios above 50 (and sometimes over 100) without hesitation.

Still, its free cash flow recently turned negative, and fell to negative $7.6 billion over the trailing 12 months. This is notable for a company that routinely generated tens of billions of dollars in annual free cash flow in past years.

Interestingly, Microsoft has the strongest free cash flows of the three. It generated almost $67 billion in free cash flow in its fiscal 2026, which ended June 30.

However, it appears to lag its competitors when it comes to AI technology. It initially partnered with OpenAI. Although it looked poised to lead the industry for that reason, Microsoft's software did not necessarily benefit from OpenAI's innovations. Consequently, its Bing search engine has not taken much of the market away from Google Search, despite the impact of OpenAI's ChatGPT.

The company is now developing AI technology independently of OpenAI and continues to improve its Copilot AI engine. Nonetheless, both Google Gemini and Anthropic's Claude tend to outpace Copilot in popularity when outside of Microsoft's Windows environment.

Furthermore, Microsoft has a significantly higher valuation, trading at 27 times earnings. Unless it can catch up to its "Magnificent Seven" competitors, it is less likely that investors will continue to pay a premium for Microsoft stock.

Choose Alphabet and Amazon

Among these three stocks, Alphabet and Amazon are the ones that belong on investors' buy lists.

Admittedly, all three companies are spending staggering amounts on capex. Moreover, even though Microsoft may lag its competitors slightly, its stock is likely more of a hold than a sell.

However, Alphabet and Amazon stand out as leaders in specific niches of AI. When also considering their ability to handle massive capex demands and their reasonable valuations, investors will more than likely profit in the long run by owning those stocks.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, and Microsoft. The Motley Fool has a disclosure policy.