Key Points
Amazon sees AWS becoming a $1 trillion revenue business.
Microsoft has the largest cloud computing backlog of the big three providers.
Alphabet's Google Cloud has seen the fastest revenue and profitability growth of the big three operators.
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The big three cloud computing providers of Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), and Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) have seen their stocks languish during much of the AI bull market as investors have wrestled with the massive amount of money these companies are spending on AI infrastructure capex.
However, commentary from Amazon CEO Andy Jassy may have just convinced the market how lucrative this business is for these companies. Jassy simply went over the economics of the cloud business model, saying Amazon breaks even on its AI chip and networking investments in two to three years, while their useful life is between five and six years. Meanwhile, most of its AI capacity is contracted out for at least five-year terms. Jassy also said the returns are generally better as time goes on because the actual data centers have a useful life of more than 30 years and those upfront costs don't need to be repeated.
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So if you've ever wondered why the big cloud companies are spending a huge amount on AI infrastructure, it's because they are locking in huge investment returns on this spending. The market is finally starting to realize this, which is why all three cloud computing stocks look like buys right now. Let's take a closer look at each.
Image source: Getty Images.
1. Amazon
Amazon is the originator of the entire infrastructure-as-a-service concept, and Amazon Web Services (AWS) remains the largest cloud provider in the world today. While its growth has lagged its two smaller peers, it really started to accelerate in Q2.
AWS revenue surged 37% in the second quarter, which was a big acceleration from the 28% growth it produced in Q1 and the 24% growth it generated in Q4. Meanwhile, AWS operating income skyrocketed 63% to $16.6 billion, with the business showing strong operating leverage as it began using more of its custom chips. Its backlog also more than doubled to $496 billion.
Amazon has a nice cost advantage with its custom Trainium AI accelerators and its Graviton CPUs, which helps it reduce inference and other costs. It also sells these chips to customers, which has become a $25 billion revenue run-rate business.
Amazon has said AWS could become a $1 trillion revenue business, making this a stock to buy while it's still attractively valued.
2. Microsoft
Microsoft was really the first cloud company to embrace AI through its partnership and investment in OpenAI. With privileged access to OpenAI's large language models, Microsoft's cloud unit, Azure, has been one of the most consistent growers. Azure has grown its revenue by 30% or more each quarter over the past three years, including 43% last quarter. Meanwhile, it expects Azure revenue to accelerate to 45% growth next quarter.
Microsoft also has the largest backlog of the big three cloud providers. Its bookings grew by 84% year over year to $678 billion, and it expects to realize about 30% of that as revenue over the next year. While commitments from OpenAI account for a large chunk of that total, impressively, the company said that the entire $50 billion in sequential backlog growth it saw came from non-frontier model companies.
With demand still ahead of capacity and a huge backlog, Microsoft is set to continue to see strong cloud computing growth well into the future. Together with a leading enterprise software business, this is a top stock to own.
3. Alphabet
Alphabet's Google Cloud saw the strongest growth of the big three cloud companies, with its revenue surging 82% to $24.8 billion last quarter and operating income more than tripling to $8.8 billion. Its backlog, meanwhile, grew to $518 billion from $462 billion in Q1.
The company arguably has the biggest cost advantage with its Tensor Processing Units (TPUs), which it developed over a decade ago and has optimized its entire software and hardware stack around. It also began recognizing TPU revenue from systems delivered to customers' own data centers in Q2, although this will become a much bigger driver next year. It is also the only cloud provider that has developed a top-tier frontier AI model, adding another cloud revenue stream.
As the company with the most complete AI stack and significant cost advantages, Alphabet is my favorite cloud computing stock, although I'd be buying all three.
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Geoffrey Seiler has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
