Two major players in the cloud sector are heavily investing in AI infrastructure, presenting a potentially lucrative opportunity for investors looking to benefit from the AI surge. But which stocks should you consider purchasing?
Amazon (AMZN +0.06%) and Microsoft (MSFT 0.06%) are both poised for growth as we move into 2026. Both companies are increasingly focusing their technology frameworks around cloud computing and generative AI. However, both face challenges, particularly with the capital demands of AI infrastructure and the unfulfilled market needs for AI technology, which could either be perceived as a challenge—or an opportunity.
Regardless, these two firms present strong long-term prospects, although one may have a slight edge over the other.
Amazon: Beyond E-Commerce
If you still think of Amazon exclusively as an e-commerce platform, some reconsideration is in order.
The company’s third-quarter figures showed net sales growth of 13% compared to last year, reaching $180.2 billion, and an operating income of $17.4 billion, with AWS (Amazon Web Services) contributing $11.4 billion of that operating income.
Interestingly, AWS is ramping up its performance even more. In the third quarter, AWS saw a 20% increase in revenue year-over-year, hitting $33 billion, which is a noticeable improvement from its earlier growth rate of 17.5% in Q2.
Additionally, Amazon’s advertising revenue is another rapidly growing segment. For the third quarter, revenue from advertising services surged 24% year-over-year.
However, there’s a concerning trend with free cash flow. While operating cash flow was up to $130.7 billion, free cash flow dropped significantly from $47.7 billion to $14.8 billion, largely due to rising capital expenditures.
Microsoft: Software Powerhouse
Microsoft appears to be edging ahead of Amazon in terms of overall growth. The company’s revenue climbed 18% year-over-year to $77.7 billion, while operating profit jumped 24% to $38 billion.
Microsoft’s cloud services are crucial for its growth. Specifically, its cloud revenue rose 26% year-over-year to $49.1 billion. Microsoft’s cloud landscape is multifaceted, including revenue from Microsoft 365, Commercial Cloud, Azure, and LinkedIn, among others. In fact, Microsoft’s Azure segment, which is focused on cloud services, experienced a remarkable 40% increase in revenue year-on-year in the first quarter of FY2026.
Like Amazon, Microsoft is also heavily focused on integrating AI within its cloud computing offerings, aligning with the noticeable demand for AI solutions among Azure customers.
During a recent earnings call, Microsoft’s CEO, Satya Nadella, highlighted their commitment to AI, saying they’re actively investing in both resources and talent to tap into the significant opportunities in this space.
The Tie-Breaker
While Microsoft may be experiencing faster growth, Amazon’s AWS remains the frontrunner in cloud infrastructure, which could make Amazon’s current investments appear less risky for stakeholders. Both companies boast diversified operations and substantial capital reserves, positioning them to capitalize on the AI trend.
The distinguishing factor may ultimately be their valuations. Amazon’s forward price-to-earnings ratio is around 28, a tad lower than Microsoft’s roughly 31, granting Amazon a slight advantage in a direct comparison.
If I had to pick one, I’d lean toward Amazon as the more favorable option. Both companies are likely to see improved prospects from 2026 onward.
Still, it’s important to recognize that both stocks carry their share of risks. The heavy investments in AI by these firms may not yet align with anticipated revenue and profits, which is something investors ought to keep a close eye on. Should the AI hype diminish, there may be a need to reassess whether these stocks can justify their current high valuations. Nevertheless, I genuinely think both stocks could perform well in the long run.
Moreover, due to the volatility inherent in this industry, both stocks are expected to fluctuate significantly. Investors who see current value in either Amazon or Microsoft should likely consider maintaining smaller positions due to the associated risks. If prices drop, there’s always the option to increase your investment later.
