Tech stocks fell out of favor in 2022, with the Nasdaq-100 technology sector index plunging 40% throughout the year. However, easing inflation and excitement over developing industries such as artificial intelligence (AI) have made Wall Street bullish about tech again.
As two of the biggest names in the industry, Amazon (AMZN -0.87%) and Microsoft (MSFT -0.82%) have benefited from renewed interest in tech. These companies are leading the way in cloud computing and AI, two booming markets that could offer massive gains over the long term.
Amazon and Microsoft are attractive growth stocks in their own right, home to potent brands that attract millions of users daily. However, knowing which is currently the better buy could take your investment far. So, let's find out whether you're better off with Amazon or Microsoft stock.
Amazon: The world's largest cloud company
Amazon Web Services (AWS) has maintained a solid lead in the cloud market for years, with a 32% market share as of the second quarter of 2023. The COVID-19 pandemic bolstered the industry as more companies adopted hybrid working styles and offered cloud-based services. While many companies have had workers return to physical offices, the need for cloud platforms has not dissipated.
Advances in AI have opened the door to a whole new range of services in cloud computing, with many companies now looking for ways to increase efficiency with the technology. Amazon is working hard to meet demand, adding several new AI services to Amazon Web Services this year. The company already boasts a long list of prominent clientele, including Sony and Netflix. If Amazon can satisfy customers with its AI tools, it could have a lucrative future in the industry and retain its dominance.
Amazon's stock is up 65% year to date, thanks to a return to profitability in its e-commerce business and growing prospects in AI. The company's retail earnings have skyrocketed this year after steep declines in 2022. However, AWS has experienced slowing growth alongside macroeconomic headwinds, with revenue growth falling from 33% in the second quarter of 2022 to 12% in Q2 2023. The company will need a return to upward growth to prove the earnings potential of its AI services.
Microsoft: Getting a head start in AI
Like Amazon, Microsoft has solid prospects in AI with its cloud platform, Azure. The company holds the second-largest market share at 22%. However, it could eventually pull ahead of the competition after getting a head start in AI. Microsoft was an early investor in the market, sinking $1 billion into ChatGPT developer OpenAI in 2019. The partnership helped Microsoft obtain exclusive licenses to several of the start-up's AI models.
Microsoft has used OpenAI's technology to introduce AI upgrades to many of its services, including bringing ChatGPT to all Azure customers. However, the tech giant arguably has better prospects in AI than Amazon, with its dominance in productivity software.
Microsoft Office brands like Word, Excel, Outlook, PowerPoint, and more have seen the company become integral to the success of countless businesses worldwide. Many of these programs now feature AI tools, bringing the technology to the masses. Meanwhile, the subscription-based service Microsoft 365 will soon launch a range of AI services. Revenue for the service grew 17.5% year over year in 2022, up from 15% in 2019.
Alongside Azure, the success of Microsoft's productivity programs diversifies its position in AI and bolsters its long-term prospects in the sector.
Is Amazon or Microsoft the better buy?
Amazon and Microsoft are leaders in their respective markets and have substantial potential in AI. However, Microsoft is the more reliable option. Alongside a firmer position in AI, the company's shares have risen 208% over the last five years, compared to Amazon's 46%. Past growth doesn't necessarily dictate what's to come. However, it does illustrate how Microsoft has been more resilient to recent economic challenges and continues to deliver stellar stock gains.
Data by YCharts
Additionally, the chart above shows how Microsoft's price-to-earnings (P/E) and price-to-free-cash-flow ratios are significantly lower than Amazon's figures. Both metrics are used to determine a stock's value and prove Microsoft is trading at a better price.
So, if you're between Microsoft or Amazon's stock, Microsoft is the better buy this month.
