Investors Are Worried About Too Much AI Spending. They're Not Wrong, But It's Paying Off for These 2 Tech Stocks.
Key Points
Amazon's AWS has $169 billion in annualized revenue, and management believes it will accelerate to $600 billion in the next decade.
Microsoft's Azure isn't far behind, with $100 billion in annualized revenue, and it's expected to increase by 45% next year.
Microsoft could have even more growth potential because its AI ecosystem is bigger than Amazon's.
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AI companies have already shoveled hundreds of billions of dollars into capital expenditures (capex) this year, and spending could surpass $1.3 trillion in 2027, according to S&P Global. The justification for the spending by many tech companies is that they are trying to position themselves as AI leaders, and by opening up their wallets, they hope to ensure they won't be left behind.
But not every AI model, fancy new AI agent, or other AI-infused technology will generate substantial revenue, let alone make a profit. That's why investors are right to be skeptical of much of the AI spending happening right now.
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Not all of it is a waste, though. Some companies are already seeing a return on their investment, such as Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN). And both companies will likely benefit from the boom in AI cloud computing for years to come. Here's how.
Image source: Getty Images.
Why Amazon's $220 billion AI spend could pay off
Amazon's leadership increased the company's capital expenditures (capex) to $220 billion this year, with most of it going to AI.
How could that massive amount be even remotely close to a good investment? Because Amazon is the leading cloud computing company with 28% of the market, according to Synergy Research Group, and companies of all shapes and sizes pay for its Amazon Web Services (AWS) for their cloud computing needs.
And business is booming. AWS now has an annualized revenue run rate of $169 billion, and Amazon CEO Andy Jassy recently said he expects it to reach $600 billion a decade from now.
If Amazon reaches anywhere near that goal, its current spending spree could be well worth the investment. What's more, AWS is a highly profitable part of Amazon's business, with $16.6 billion in operating income and an operating margin of more than 39%.
For investors looking for proof of revenue and earnings from AI investments, Amazon is already delivering.
Microsoft is spending $175 billion, but Azure growth is accelerating
Microsoft's Azure cloud service is very similar to Amazon's AWS, and it's benefiting from the same demand for cloud services even as it ramps up capex spending to $175 billion this year.
Azure sales have an annualized revenue run rate of $100 billion -- up 41% from the previous year -- and they continue to accelerate. Microsoft's management says revenue from its cloud service could increase by 45% in fiscal 2027.
Azure is a significant portion of Microsoft's business, with intelligent cloud segment sales (which includes Azure) accounting for around 44% of total sales.
Microsoft's management has already said that "demand continues to exceed available capacity," strongly hinting that there's plenty more room for Azure growth ahead.
You might wonder how both Microsoft and Amazon, which are competitors, can benefit equally from this heavy cloud demand. And the answer is that they essentially have a duopoly in the market, with AWS at 28% (as I mentioned earlier) and Microsoft Azure at 21%. This is a huge advantage for both of them because their leads were established years ago and are nearly impossible for any rivals to overcome now.
Which AI stock looks like the better buy right now?
While both companies are seeing impressive results from their AI investments, my choice between the two would be Microsoft.
I think the company has an edge over Amazon because it has an additional opportunity to grow from AI software and service sales. The company has more than 30 million paid seats for its Copilot AI agent software -- a 50% jump in just several months. As AI agents become more widespread, Microsoft's dominance in the enterprise software will help it to attract even more users.
Because Copilot integrates with Azure, Microsoft can offer enterprise customers a comprehensive ecosystem of AI agents, cloud services, and enterprise software that Amazon can't match.
Should you buy stock in Microsoft right now?
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, and S&P Global. The Motley Fool has a disclosure policy.
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