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Better Buy: Microsoft vs. Amazon
February 24, 2022
When investors think of “Big Tech” stocks in the US, there are only a handful of companies that can claim to belong in that group.
Microsoft Corporation (NASDAQ: MSFT) and Amazon.com Inc (NASDAQ: AMZN) fit the criteria. They are the two largest cloud infrastructure platform providers in the world.
Amazon Web Services (AWS) maintained its pole position in the enterprise cloud market by the end of last year with a 33% global market share while Microsoft’s Azure cloud service is gaining momentum and is not far behind in second spot (with 21% market share).
Both companies will benefit from the increase in spending on cloud services, which International Data Corporation (IDC) forecasts will grow at a compound annual growth rate (CAGR) of 16.9% to surpass US$1.3 trillion by 2025.
But which tech giant is the better cloud play amid the uncertainties seen in global stock markets?
1) Revenue growth of Azure and AWS
While Amazon remains the largest enterprise cloud provider, Microsoft’s Azure is actually growing at a faster pace.
For example, AWS is growing revenue between 30% to 35% year-on-year but Azure is actually growing in the range of 46% to 50%.
Microsoft is gaining ground on Amazon and while it is still too early to see if the Redmond-based tech giant can overtake Amazon, it’s doing a good job at closing the gap.
Since Satya Nadella took over as Microsoft CEO in 2014, the company has adopted a “mobile first, cloud first” mantra and aggressively expanded its Azure, Office 365, and other cloud-based services.
This has helped the company to catch up with Amazon in the cloud computing space.
Meanwhile, at Amazon, Jeff Bezos, has recently handed the CEO role to Andy Jassy, the former chief of AWS, highlighting the company’s focus on its cloud business.
2) Cloud services and integration
One of the biggest advantages that Microsoft has over Amazon is its integration with Windows, Office 365, Dynamics and other cloud-based services.
Under Nadella, the company has also shifted towards a more collaborative tone.
For example, despite being a competitor with the likes of Amazon and Alphabet Inc’s (NASDAQ: GOOGL) Google Cloud on the cloud platforms, Microsoft is offering its Microsoft Defender for Cloud services for both Google Cloud and AWS.
Microsoft has also invested heavily in other services such as software security, which is an integral support function for cloud services.
This includes the acquisition of cybersecurity software maker, RiskIQ, IoT security-focused ReFirm and CloudKnox Security in 2021.
In comparison, much of Amazon’s focus is on its online marketplace.
3) Post-pandemic growth
Amazon was the clear winner during the pandemic as consumers sat at home and shifted towards online shopping. Aside from that, demand for its AWS services also picked up.
However, with the gradual reopening of the economy, consumers will return to shopping malls. This will result in a moderation in growth for Amazon.
Meanwhile, Microsoft saw some impact from the pandemic as large companies shut down, affecting its enterprise-facing software businesses.
Microsoft, however, has managed to take advantage of the pandemic to expand its cloud, Surface and gaming businesses.
It also pushed forward its Teams platform, remote working software, although the adoption initially was not as strong as Zoom Video Communications Inc’s (NASDAQ: ZM) offering.
Given that Microsoft has a recurring-income services business model, it should generate more stable growth in the post-pandemic period when compared to Amazon.
4) Dividend payments
Finally, unlike Amazon, Microsoft also returns cash to shareholders via a dividend payout.
Microsoft’s stable earnings growth has enabled it to raise its dividend every year since 2003 (see table below).
Currently, it is paying a forward dividend yield of around 0.8% and the dividend safety is excellent with just 28% of its free cash flow spent on the payout.
Sources: SeekingAlpha, Prosperous
Both Microsoft and Amazon are not cheap. Amazon is trading at a forward price-to-earnings (PE) ratio of 63 times while Microsoft is trading at a PE of 30 times.
The premium reflects the business growth of the two companies as cloud adoption is expected to remain strong over the next five years.
Overall, though, Microsoft trades at a cheaper valuation on a PE basis versus Amazon.
Microsoft the clear winner
I think Microsoft is clearly the better buy for investors rather than Amazon, based on the five metrics above.
Personally, I think both the companies are good long-term investments, but I am more optimistic that Microsoft is the clear winner in the near to mid term.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.