3 Cloud Leaders That Will Make a Fortune From AI
Key Points
Amazon and Alphabet are two of the biggest names in cloud infrastructure, and they're experiencing huge growth.
The rapid growth of neocloud company Nebius comes with some major risks.
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Cloud computing infrastructure is vital to the artificial intelligence (AI) arms race, as few companies have in-house access to the computing power that serious AI workloads require. So most developers of AI systems have to rent compute from those that have excess capacity. With demand for AI computing off the charts, this makes several stocks in this industry fantastic buys right now.
Three that I'm focused on are Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), and Nebius (NASDAQ: NBIS). While you're likely familiar with the first two companies, the third may be more of a mystery. However, I think investing in a basket of these stocks makes a ton of sense, as Amazon and Alphabet already operate profitable businesses and have strong futures ahead, while Nebius offers huge upside potential, as its growth rates are exceptional.
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Amazon and Alphabet
Amazon Web Services (AWS) and Google Cloud are two of the three largest cloud computing providers in today's market. Both are seeing strong demand for their cloud computing services, which is why they each plan to spend at least $200 billion on data center capital expenditures this year. This spending isn't in vain: AWS' growth rate has accelerated to a 37% pace, while Google Cloud's has skyrocketed to 82%. That shows major return on investment, and with further capex hikes expected next year, these two are in for multiple years of strong growth.
If the growth of AI use continues at its current pace and all of this computing capacity is needed in perpetuity, then Amazon and Alphabet stand to benefit over the long haul, as cloud computing is a rental business; with each workload run on their cloud platforms, they get paid. That's a great kind of business to be in. Demand is certainly there, as Google Cloud's backlog reached $514 billion as of the end of the second quarter, while Amazon's reached $496 billion. For reference, AWS' trailing 12-month revenue was just shy of $150 billion, so it already has three years' worth of revenue contracted out, not to mention new deals coming down the pike.
These two are in a strong position to benefit from a long and sustained AI build-out. However, Nebius offers even more upside potential.
Nebius
Nebius is a neocloud company, which means it focuses on building AI-first cloud computing infrastructure. It has been rapidly expanding its footprint due to huge demand. It's also far smaller than Amazon or Alphabet, so it can be nimble and pick up contracts that may be too small for the major cloud giants to pursue. This is driving strong growth for Nebius, and it's growing at a torrid pace. In Q2, its revenue rose 454% year over year. That kind of massive growth can be hard to grasp, so let's look at it from a more familiar perspective. Let's say your salary last year was $100,000. If you received a 454% raise, that would give you a salary of $554,000. That's what's happening to Nebius' top line.
In Q3 and Q4, Wall Street analysts expect 519% and 540% year-over-year revenue growth, respectively. For 2027, they expect another 268% increase. As long as the AI arms race continues, Nebius can keep delivering significant growth.
However, Nebius is not profitable right now. It's spending every penny it can get its hands on to increase its data center footprint because demand for its compute capacity is there. The trick for Nebius' management team will be to find a way to make the operation profitable before the rising demand wave ends. If it can do that and match the profitability levels of the cloud units at Alphabet and Amazon, it will prove a fantastic investment. If it can't, it could be a dud. I'm bullish on Nebius' outlook, but its path ahead won't be easy.
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Keithen Drury has positions in Alphabet, Amazon, and Nebius Group. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.
