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Following the midterm elections and sweeping victories by candidates opposed to artificial intelligence (AI) data centers, there has been a lot of debate about which AI companies are best positioned in this new political climate.
However, the general consensus seems to be that leading cloud computing companies with strong businesses, like Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT), are well positioned to benefit. Of these two, I think Amazon has a lot more upside. Here's why.
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Amazon Web Services (AWS) and Microsoft's Azure are the two largest cloud providers. With the rise of AI, both companies have seen their cloud computing businesses take off.
Microsoft has recorded 13 straight quarters of 30% or more Azure growth, with a 48% increase last quarter to $33.2 billion. AWS has seen its growth accelerate to its fastest level in nearly five years, climbing 39% to $46 billion last quarter.
Microsoft's cloud business continues to be bolstered by its relationship with OpenAI. The company has priority access to OpenAI's models and products through 2032, and it owns a 27% stake in the maker of large language models. Microsoft also has huge commitments from OpenAI, which is a big reason for its huge $677 billion backlog.
Amazon also has a huge backlog, which more than doubled last quarter to $578 billion. The company has a close relationship with and a large stake in Anthropic, which has committed to spending over $100 billion with AWS. It also has a partnership with OpenAI around agentic AI. Amazon offers access to various third-party AI models through its Bedrock solution, which has helped drive growth.
What sets Amazon apart from Microsoft, though, is its custom chip business. Earlier this year, Amazon said its custom chips business -- which included its Trainium AI accelerator and Graviton custom ARM Holdings-based central processing unit (CPU) -- was a $20 billion run-rate business, or roughly $50 billion when including internal use.
Last quarter, it said its chip business more than doubled and that chip commitments have soared 20-fold. Demand is so high for its chips that it plans to start selling them to external data centers late next year. Amazon's custom chip business is both a revenue driver and a cost saving, helping it reduce inference costs and giving it better returns than with graphics processing units (GPUs).
Microsoft has developed its own custom chips, called Maia, and has its own ARM-based CPUs, but it's still very early, and it is nowhere near the scale of Amazon's chip business. As Amazon continues to growth this business and become less reliant on GPUs, I'd expect its two- to three-year AI infrastructure investment payback to move lower over time, giving it the edge over Microsoft.
Both Amazon and Microsoft also have strong non-cloud businesses. Microsoft is the leader in enterprise productivity software, and the company is seeing strong growth from a combination of more users deploying its AI Copilot assistants and a shift toward a hybrid model that includes AI usage. Last quarter, it saw an impressive eightfold increase in Copilot users to 50,000 seats.
Amazon is the leader in e-commerce. Any potential future reductions or elimination of tariffs should be great for this business. However, what it most impressive is how much operating leverage Amazon has been able to achieve through its use of robotics, automation, and AI. This is helping segment profitability grow much more quickly than revenue growth.
While Microsoft's stock has upside from here, I think Amazon is the clear winner. Its AWS business is starting to see growth accelerate, and its custom chip business gives it a clear edge. Meanwhile, the shift in the political landscape could become a big catalyst if tariffs eventually go away or get reduced.
With both stocks trading at similar valuations, I prefer Amazon between the two and would be a buyer of the stock.
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Geoffrey Seiler has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Arm Holdings, and Microsoft. The Motley Fool has a disclosure policy.
Amazon and Microsoft Lead the Cloud Market. One of Them Has Far Greater Upside. was originally published by The Motley Fool
