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The horse race between Amazon and Microsoft\u2019s cloud computing businesses has gone through various phases over its nearly two-decade history, with the current AI boom pushing the rivalry to a new, and perhaps unsustainable, level of intensity.\u00a0<\/p>\n
Each company is set to spend roughly $200 billion this year building out its data centers\u2014an unprecedented level of investment\u2014in a frenzied bid to keep up with demand for AI services and to avoid getting overtaken by other cloud rivals like Google. The cloud titans have also forged partnerships and deals with the big AI model makers, creating a web of shifting alliances that each hopes could reshape the competitive landscape.<\/p>\n
This week, investors will get an important update on the state of this epic cloud rivalry, when Microsoft reports its quarterly earnings on Wednesday and Amazon follows suit on Thursday. While Amazon and Microsoft have been locked in the cloud battle for years, the pressure has never been higher and investor patience has never been more unpredictable. Revenue growth, profit margins, and customer backlogs at Amazon Web Services and Microsoft Azure will be closely scrutinized. But the costs of the race will also be destiny determinants, as investors question the massive sums of capital being deployed and the timeline for seeing a return on the investment.<\/p>\n
Last Thursday, Google parent Alphabet\u2019s stock cratered 7% after the company raised its capital-expenditure projections for the year and reported negative free cash flow in its second quarter. For Amazon and Microsoft, the two cloud computing leaders, getting an edge could hinge on who can convince investors that they can soak up all that investment and spin it into gold faster.\u00a0<\/p>\n
Luke Rahbari, CEO of Equity Armor Investments who holds both stocks across several portfolios, said that even the act of raising and allocating capital has become a competitive bloodsport.\u00a0<\/p>\n
\u201cWhoever controls the money controls the winners,\u201d said Rahbari. \u201cYou\u2019ve got to soak up as much money as you can so there isn\u2019t as much money available to other players.\u201d<\/p>\n
Rahbari said he\u2019ll be listening this week for signs of shakiness, and cracks in the voices of Microsoft CEO Satya Nadella and Amazon\u2019s Andy Jassy, like the kind Rahbari made \u201cwhen I had to call my parents from boarding school and tell them what kind of trouble I got into.\u201d<\/p>\n
\u201cFrenemies\u201d<\/p>\n
Most investors are all in on both sides of the horse race. Amazon and Microsoft are two of the five largest weights in the S&P 500 with 8% to 9% of the index between them, so anyone investing for retirement has skin in the game. But the crux for any investor is that the massive spending must start flowing back to these companies as massive returns within the next few years. According to data from S&P Capital IQ, Microsoft\u2019s stock trades at about 23 times expected earnings, cheaper than Amazon\u2019s 27 times. Year-to-date, Microsoft\u2019s stock is down 19%, while Amazon has been generally flat to up 2.5%.\u00a0<\/p>\n
Melissa Otto, global head of Visible Alpha research at S&P Global, described Amazon and Microsoft as competitors in a sense, but said she thinks of them more like \u201cfrenemies.\u201d The hyperscaler market between Amazon Web Services, the name of Amazon\u2019s cloud business, and Microsoft\u2019s Azure cloud business operates largely with each holding a distinct slice. In her view, AWS is the flexible, customizable platform that is ideal for startups and for enormous machine learning workloads. It\u2019s also more difficult to learn, she said. Azure extends the Microsoft software that enterprises already run, which makes it easier to adopt, she said.\u00a0<\/p>\n
In sum, the two have different strengths and chase different clients. When they do go after the same cohort of companies, customers often wind up buying both, she said.\u00a0<\/p>\n
The data, however, shows why it\u2019s still essentially a horse race.\u00a0<\/p>\n
Between them, Microsoft and Amazon own half the cloud market, with Amazon\u2019s 28% market share topping Microsoft\u2019s 21%, according to Synergy data. Google Cloud, occupies the third spot, with its share of the market fluctuating between 12% and 14% depending on the quarter.<\/p>\n
Based on Visible Alpha consensus estimates, AWS could reach $168 billion in net sales in 2026, up from last year\u2019s $128.7 billion, a 30.7% rise. The margins AWS earns on that revenue, Otto said, \u201care sensational\u201d at 93.8% gross margin, with a 35.4% operating margin expected. AWS has a current backlog of remaining performance obligations\u2014signed customer contracts that will bring future revenue\u2014of $364 billion, which excludes a recent $100 billion deal with Anthropic, Bank of America analysts wrote in a recent note, and said its in-house chip revenue commitments exceed $225 billion.\u00a0<\/p>\n
Microsoft\u2019s Azure and its other cloud services are expected to reach $148.9 billion in the company\u2019s fiscal 2027, up about 40% from roughly $106 billion in fiscal 2026, which ended in June.\u00a0Still, Microsoft\u2019s pace puts them slightly ahead of AWS, although it\u2019s on a somewhat lower base, said Otto.\u00a0<\/p>\n
Microsoft doesn\u2019t report metrics for Azure in the same way Amazon does for AWS. Visible Alpha estimates the Intelligent Cloud business earns an operating margin of about 47%, higher than AWS\u2019s 35%. But that figure also includes older, higher-margin server software, so the actual number might be lower. Microsoft disclosed nearly $627 billion of remaining performance obligations which is 99% higher year-over-year, BofA analysts wrote. The RPO figure includes its entire commercial business, however, including Azure, M365, and Dynamics.<\/p>\n
\u201cNot only is [the Intelligent Cloud business] very profitable, it\u2019s more profitable than AWS and growing faster,\u201d Otto said, although that edge could be because enterprises are adopting AI and spending to keep up.\u00a0<\/p>\n
Still, it\u2019s anyone\u2019s game.\u00a0<\/p>\n
\u201cWe\u2019re still extremely early days, so there isn\u2019t really an established winner,\u201d\u00a0 said Otto. \u201cThat\u2019s why it\u2019s such an arms race, because the incumbents don\u2019t want to lose their edge.\u201d<\/p>\n
Both companies are plowing cash into their businesses, buying gear and building data centers to expand their cloud and AI services. Amazon\u2019s free cash flow dropped to $1.2 billion during the past 12 months from $25.9 billion a year ago, and it more than doubled its bond debt to more than $120 billion. Microsoft isn\u2019t issuing new bonds and is instead funding a buildout of roughly $35 billion per quarter from its operating cash flow. Its free cash flow for the 12 months ending in March was $73 billion, which was actually up slightly year-over-year, though analysts say comparing the cash flow directly to AWS is complicated because of the different ways the two companies\u2019 finances are structured.<\/p>\n
The Longshot<\/p>\n
For Microsoft, the cloud race began as a longshot, as Nadella described recently.<\/p>\n
\u201cI remember when I became CEO, everybody said, oh my God, isn\u2019t it too late man? Like, why even bother to build a public cloud because Amazon is so far ahead,\u201d Nadella recalled at a Morgan Stanley conference in March. \u201cWe knew it was going to be multiplayer. We knew that there is going to be margin, and we kept building.\u201d<\/p>\n
The building has now reached a scale that investors could never have predicted. Amazon has guided to about $200 billion in capital expenditures across the company in 2026. Microsoft spent $104 billion in the first nine months of its fiscal year 2026, and is expected to land near $190 billion for the calendar year, based on guidance from CFO Amy Hood in April.<\/p>\n
Jassy has told shareholders the AWS spending is almost all spoken for, including a commitment from OpenAI of more than $100 billion.\u00a0<\/p>\n
\u201cWe\u2019re not investing approximately $200 billion in capex in 2026 on a hunch,\u201d he wrote in his annual letter to investors. \u201cOf the AWS capex we expect to spend in 2026, much of which will be monetized in 2027-2028, we already have customer commitments for a substantial portion of it.\u201d<\/p>\n
AWS has to splash out cash on land, power, and compute about six to 24 months before it can bill customers for cloud services, he wrote.<\/p>\n
\u201cThe more capacity we open up, we sell it immediately,\u201d Matt Wood, AWS\u2019s chief AI and Technology officer told Fortune.\u00a0<\/p>\n
Nadella\u2019s conviction on the massive investment rests on software, the backbone of Microsoft. Asked in March at the Morgan Stanley conference how to think about the return on all the capital Microsoft is spending, he offered a three-pronged answer that includes diverse customers, strong utilization, and a multi-generation total cost of ownership curve.<\/p>\n
\u201cWe have OpenAI book, we have Anthropic book, but we want to also have the long tail of enterprise IT,\u201d Nadella said.\u00a0<\/p>\n
With both Microsoft and Amazon neck-and-neck, the two cloud businesses are are selling out of everything they can build.\u00a0<\/p>\n
According to Amazon\u2019s Wood, the applications that will fund returns are still newborns. The handful of available breakout AI products include chat assistants and coding tools, much like the early days of the internet when there were only a few websites.\u00a0<\/p>\n
\u201cWe\u2019re going to have millions of them, just like we have millions of websites today,\u201d said Wood. Efficiency gets customers in the door, but \u201cthere are going to be entirely new categories of products that just didn\u2019t exist a year ago that are going to be absolute breakthrough smash hits.\u201d<\/p>\n
Both companies are selling everything they can build and throwing everything they have at building as fast as they possibly can. Whether that converts into the returns investors are waiting for gets its next test this week.<\/p>\n
#Amazon #Microsoft #spending #billion #AIand #investors #patience<\/p>\n","protected":false},"excerpt":{"rendered":"
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