Editor's note: Inaccurate information about use of Azure has been removed from this article. In an SEC filing on March 31, Microsoft noted that a March 28 blog post it made "contained, among other information, a statement that 'We have seen a 775 percent increase of our cloud services in regions that have enforced social distancing or shelter in place orders.' The metric in this statement was intended to refer only to a specific cloud-based service, Teams calling and meeting monthly users, in a specific country, Italy. The statement was not intended to provide information about the performance of Azure and cloud services generally, Microsoft’s Intelligent Cloud segment, or Microsoft as a whole. We corrected the blog entry to clarify the nature of this information on March 30, 2020."

With millions of people sheltering in place amid the COVID-19 pandemic, the cloud computing market is getting a serious usage boost. 

Schools, corporations, and individuals are using cloud-based software to learn, collaborate, and stay connected. That's driving increased demand for cloud services, boding well for the likes of Amazon (NASDAQ:AMZN), through its Amazon Web Services, and Microsoft (NASDAQ:MSFT),  through its Azure services.

Amazon is the overall leader in this sector, but Microsoft is a scrappy second-place player. It's been chipping away at AWS' lead, and with demand surging amid the pandemic, it's emerging as the better cloud computing stock to own. 

A blue background with a computer glare on the ground beaming up to several clouds.

Image source: Getty Images.

Cloud demand surges during the COVID-19 pandemic 

The COVID-19 pandemic is changing the way the world operates, including how we work. A significant number of companies deemed non-essential have transitioned to remote work environments to remain in operation, using cloud-based software to collaborate and work. At the same time, a large segment of the population is practicing social distancing and turning to virtual tools to stay connected. 

That plays into Microsoft's strengths thanks to many of its software tools that reside on the cloud. Take Skype, its cloud-based video conferencing tool. Since the pandemic hit, Skype has seen a 70% surge in daily users. Skype calling minutes are up 220%.  

Microsoft's Teams collaboration tool is also enjoying red-hot demand, with daily active users jumping by 12 million in one week alone in early March. Since then, demand continues to surge as more workers get used to the new work-at-home norm.

That demand for cloud-based services isn't going to go away anytime soon, even if cities begin easing social distancing rules in the coming weeks or months.

Take the tech giant's newly signed deal with the National Basketball Association as one example of what the future may look like. The NBA is adopting Microsoft's Azure cloud to offer fans an enhanced experience. The NBA suspended its basketball season in March. To get the season going again, there is a real chance that games could be played in empty arenas and broadcast to fans. If that's the case, the NBA is hoping its cloud deal with Microsoft will help keep fans engaged remotely. The NBA isn't the only sports league that has to figure out how to keep fans coming back for more while stay-at-home orders are in place. The deal with the NBA may be the first of more to come for Microsoft.

Then there's Office 365, Microsoft's cloud-based productivity software offering that has more than 38 million subscribers. In an effort to get more consumers to pay monthly instead of upgrading their OS every few years, Microsoft is rebranding Office 365 into Microsoft 365, and is adding more AI-driven features. It's also launching a subscription plan  that costs $9.99 a month for families and $6.99 a month for individuals.   

That's not to say AWS isn't winning cloud contracts, but Microsoft's moves are more high profile and, given the pandemic, could be winning bets over the long run. 

Microsoft gets a win in the Pentagon contract fight 

An important growth area for both AWS and Microsoft are federal, state, and local governments. With many government systems outdated and in need of an upgrade, Microsoft and AWS have been jockeying for contracts. The biggest of all, the Joint Enterprise Defense Infrastructure project or JEDI, a 10-year $10 billion move to the cloud for the Pentagon, was awarded to Microsoft last year, driving the stock higher. But it was quickly contested by AWS, which said it was the shoe-in to win the contract until President Donald Trump got involved. That's prompted AWS to file a lawsuit seeking to get the contract halted, claiming political bias. 

Both companies have much to lose by not landing the contract, but Microsoft is in a more precarious position. In order to win more government contracts it needs to get in the door, something AWS has already achieved.

The case is still being worked out in the courts, but Microsoft did get a partial win this month, when the Defense Department's inspector general found that awarding the full contract to Microsoft (instead of breaking it up among its rivals) was "consistent with applicable acquisition standards," and not driven by political bias on the part of the Trump administration.

That was welcome news to Microsoft, which said the inspector general's report shows the DoD properly awarded the contract to the software giant. In a blog titled "It bid high and lost. Should Amazon be allowed to do-over on JEDI?," Microsoft's deputy general counsel Jon Palmer argued Amazon lost the contract because it priced its offering too high, not because Trump hates AWS owner Jeff Bezos. 

"There is a simple explanation for Microsoft's victory -- the strength of our technology, and our willingness to listen to and respond to our potential customers," wrote Palmer. "Even if you believe that Amazon may have started as the front runner, it's clear our team worked hard to catch up and surpass them by investing in our technology and listening to the DoD."

It's not clear what the courts will decide, but with cloud momentum growing at Microsoft and more opportunities to grow because of the COVID-19 pandemic, Microsoft is the better cloud computing stock.