Needham analyst Laura Martin recently told clients that Apple has fallen far behind its big-tech peers in generative artificial intelligence (AI), a technology poised for rapid adoption as the broader AI market explodes in the coming years. Martin pointed specifically to Amazon (AMZN -1.27%) and Microsoft (MSFT -0.49%), predicting that both cloud companies would be "twice as big as Apple" when the dust settles.
Here's what investors should know about these growth stocks.
1. Amazon
The bull case for Amazon draws on its leadership in online retail and cloud computing and its momentum in digital advertising. Specifically, Amazon is the largest e-commerce company in North America and Western Europe. Amazon Web Services (AWS) is the largest public cloud in the world, and it offers the broadest and deepest portfolio of artificial intelligence (AI) services. And Amazon recently became the third-largest adtech company in the world.
Amazon impressed Wall Street with its second-quarter report, delivering its biggest earnings beat in more than two years. Revenue increased 11% to $134 billion on good momentum in e-commerce, cloud computing, and digital advertising, and generally accepted accounting principles (GAAP) net income improved to $6.7 billion, up from a loss of $2 billion in the prior year. But the stock looks undervalued right now in the context of future growth opportunities.
Here's the big picture: Industry watchers forecast retail e-commerce sales to increase 8% annually through 2030, while the cloud computing and adtech markets are projected to increase at roughly 14% annually over the same period. Those opportunities hint at low-double-digit revenue growth for Amazon. Indeed, Morgan Stanley currently expects sales to climb at 12% annually through 2026.
Yet Argus analyst Jim Kelleher thinks AWS is "uniquely positioned in the burgeoning AI-as-a-service market" due to its cloud leadership. That point is particularly salient because the generative AI market is expected to expand at 42% annually through 2033, and AWS is leaning into that opportunity with recent products like Amazon Bedrock. That catalyst could translate into even faster sales growth.
In any case, Amazon's current valuation of 2.6 times sales looks cheap by comparison, especially when the three-year average is 3.2 times sales. Amazon may or may not eclipse Apple's valuation in the future, but the question is ultimately irrelevant. What matters is that shares look cheap in context. Investors should feel comfortable buying a small position in this FAANG stock today.
2. Microsoft
The bull case for Microsoft builds on its strong presence in enterprise software and cloud computing. Microsoft is a recognized leader in several software categories, including office productivity, unified communications, and enterprise resource planning, among others. Indeed, the company raked in 16.4% of all software-as-a-service (SaaS) revenue last year, accounting for nearly twice as much market share as its closest competitor.
Microsoft is also the second-largest cloud infrastructure and platform services (CIPS) provider. Azure accounted for 22% of CIPS spending in the second quarter, up from 21% in the prior year. That strong market presence is partially due to brand authority cultivated in software, but it also reflects heavy investments in areas like developer tools and AI.
Indeed, Microsoft was recently named a leader in cloud AI developer services by research company Gartner, and CEO Satya Nadella says Azure packs the "most powerful AI supercomputing infrastructure in the cloud."
Microsoft reported solid financial results in the fourth fiscal quarter (ended June 30). Revenue increased 8% to $56 billion on momentum in enterprise software and cloud services, and GAAP earnings rose 21% to $2.69 per diluted share.
Microsoft has a unique advantage in generative AI due to its partnership with OpenAI. Azure is the exclusive cloud provider to OpenAI and the only cloud provider that offers access to OpenAI's GPT large language models made famous by ChatGPT. Through Azure OpenAI Service, businesses can fine-tune those models to build custom generative AI applications.
So what? Morgan Stanley says Microsoft is the software company "best positioned" to monetize generative AI. That tailwind, coupled with strength in enterprise SaaS and cloud computing -- two markets expected to grow at roughly 14% annually through 2030 -- hints at low-double-digit revenue growth through the end of the decade.
In turn, that makes its current valuation of 11.5 times sales appear palatable, especially given that it aligns with the three-year average of 11.4 times sales (and Microsoft nearly doubled the returns of the S&P 500 over the last three years).
Similar to Amazon, Microsoft's ability to eclipse Apple's valuation is immaterial. The company is well positioned to benefit from the AI boom, and investors should feel comfortable buying a small position in this growth stock today.
