Amazon and Alphabet Are Each Spending At Least $200 Billion on Data Centers This Year. Here's Which Stock Outperforms Through 2028.

Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) are two of the biggest spenders in the artificial intelligence (AI) race. This year, Alphabet plans to spend about $200 billion on data center capital expenditures. Not to be outdone, Amazon plans to spend about $220 billion. Those figures may be hard to fathom, but when you see the returns on investment that these two are generating from the data center infrastructure they're building, it starts to make sense.

But which one of these makes the most sense from an investment standpoint? I think it's Amazon, and the reason why may not be obvious to many investors.

Image source: Getty Images.

Building out their cloud computing units

Amazon and Alphabet may be using some of the computing power they are acquiring for internal growth, but the majority of it will be rented out to their clients via their cloud computing platforms. Amazon Web Services (AWS) and Google Cloud have become massive parts of their respective businesses, and demand for their services has never been higher. Google Cloud's backlog reached $514 billion during the second quarter. For reference, Google Cloud's revenue was $24.8 billion in Q2. So, if Google Cloud ceased to grow its data center footprint, it would take over five years for it to churn through this backlog. Obviously, it's not standing still -- thus, the $200 billion spending bill this year -- and that will lead to substantial annual revenue growth in the near future.

AWS' backlog of $496 billion is almost as large, but its computing platform is far larger and delivered $42.2 billion in revenue during Q2, so it won't take as long for it to fully deliver on that backlog. Still, that isn't stopping Amazon from spending big on its computing capacity, as it sees demand growing. CEO Andy Jassy noted that Amazon doesn't have nearly the amount of computing capacity necessary to meet demand in 2026, and that will likely be the case in 2027. As a result, they're already seeing demand for 2028 starting to appear. That's unusual for this business, and indicates how much the cloud computing market will grow over the next few years.

AWS has a bigger influence on Amazon's bottom line

During Q2, Google Cloud grew at an 82% year-over-year clip, while AWS grew at a 37% pace. So at first glance, investors might assume Alphabet is the better stock to invest in, but that's not the full picture.

The reality is that in terms of profitability, Google Cloud is an average business unit for Alphabet. Its Q2 operating margin of 36% was only slightly higher than Alphabet's companywide margin of 34%. However, AWS' 39% operating margin was far higher than Amazon's companywide margin of 14%. In fact, AWS accounted for about 60% of Amazon's operating profits during Q2.

So, what does this mean?

While Google Cloud is smaller than AWS and will likely grow faster over the next few years, that expansion only marginally accelerates Alphabet's companywide growth, particularly since it's still far smaller than its other business units. On the flip side, AWS is a massive part of Amazon's business, and whenever its revenue growth accelerates, Amazon's overall profit growth accelerates even faster (assuming Amazon's commerce segment margins remain fairly steady). This means that Amazon's massive $220 billion capex bill for 2026 will have a more significant effect on the company's profits than Alphabet's $200 billion spending will have on its profits. I think that will lead to Amazon outperforming Alphabet through 2028.

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