Apple is the most valuable public company in the world, with a market capitalization of $2.8 trillion. But Needham analyst Laura Martin said she believes the iPhone maker will be supplanted by the three cloud giants amid growing demand for all things related to artificial intelligence (AI).
Martin predicts Amazon (AMZN 2.29%), Microsoft (MSFT 1.44%), and Alphabet (GOOGL 0.66%) (GOOG 0.56%) could be worth twice as much as Apple when the dust settles from the AI revolution.
Here's what investors should know.
Image source: Getty Images.
The artificial intelligence boom is coming
Research from Morgan Stanley suggests that artificial intelligence could hasten the adoption of e-commerce, digital advertising, and cloud computing by improving the user experience in each market. Those AI-enabled upgrades would let companies tap into $6 trillion in relevant offline spending.
Morgan Stanley strategists also expect generative AI to create $4 trillion in economic value by improving labor productivity over the next three years. That automation-driven uptick in workforce efficiency could push the generative AI software market to $820 billion by 2026.
Of course, estimates vary among Wall Street analysts. Goldman Sachs believes generative AI could add $7 trillion to the global economy over the next decade, and Bloomberg Intelligence values the generative AI market at $1.3 trillion by 2032. But Wall Street generally agrees on one thing: The AI boom is coming.
With that in mind, Amazon and Microsoft are arguably better positioned to benefit than Alphabet because they are larger players in the cloud infrastructure and platform services (CIPS) market. Specifically, Amazon Web Services accounted for 32% of CIPS spending in the most recent quarter, while Microsoft Azure accounted for 23% of CIPS spending, and Alphabet accounted for 11% of CIPS spending, according to Synergy Research Group.
Amazon: The market leader in cloud AI developer services
Amazon is primed to benefit from AI-driven adoption of e-commerce and digital advertising. It already operates the most-visited online marketplace in the world, and it recently became the third-largest ad tech company. But Amazon is leaning into AI to improve its standing in both markets, as detailed below:
- E-commerce: Amazon is using generative AI to help shoppers discover better products on its marketplace, and the company is enhancing its logistics operations with AI-powered forecasts that improve inventory management and optimize last-mile delivery routes.
- Digital advertising: Amazon recently launched a generative AI tool that turns product photos and descriptions into brand-themed or lifestyle-themed images, which helps advertisers work more efficiently.
Beyond retail and advertising, Amazon should also benefit from AI-driven adoption of cloud computing. AWS offers the most comprehensive suite of cloud capabilities on the market, and IT consultancy Gartner recently recognized the company as a leader in cloud AI developer services, citing a greater ability to execute than any other vendor.
In September AWS bolstered its developer suite with Bedrock, a cloud service that connects clients with pretrained models that can be incorporated into custom generative AI software. The recent launch of Bedrock comes just a few months after the launch of CodeWhisperer, an AI-enabled coding companion that helps developers build software more quickly.
Here's the bottom line: Amazon reported revenue growth of 13% in the most recent quarter, and investors can expect similar momentum in the coming years. Indeed, Morningstar Analyst Dan Romanoff expects sales to increase by 11% annually through 2027. That forecast makes its current valuation of 2.6 times sales look cheap. Investors should feel comfortable buying this growth stock today.
Microsoft: The software company best positioned to monetize generative AI
Microsoft is the gold standard in multiple enterprise software verticals, including office productivity (Microsoft 365) and enterprise resource planning (Dynamics 365). The company accounted for 16.4% of software-as-a-service (SaaS) spending last year, twice as much as the closest competitor, and Microsoft is pressing its advantage by leaning into generative AI.
Microsoft 365 Copilot is a generative AI assistant that integrates with Word, PowerPoint, Excel, and other productivity software products to automate workflows like summarizing documents, creating presentations, and drawing insights from spreadsheet data. Similarly, Dynamics 365 Copilot is a generative AI assistant that will automate workflows across sales, marketing, finance, and supply chain management.
The enterprise SaaS market is forecasted to grow at 14% annually over the next decade, but Morgan Stanley analyst Keith Weiss sees Microsoft as the software vendor "best positioned" to monetize generative AI. In that context, Microsoft should manage to grow sales more quickly than the broader enterprise SaaS market.
Microsoft is also well-positioned to benefit from AI-driven adoption of cloud computing. CEO Satya Nadella says Azure offers the "best AI infrastructure" in the cloud, and its exclusive partnership with OpenAI should be a source of ongoing momentum. For instance, Azure indirectly benefits from products like ChatGPT because it powers all OpenAI workloads. Azure also provides direct access to OpenAI models, meaning clients can incorporate the technology behind ChatGPT into their own generative AI applications
The cloud computing market is forecast to grow at 14% annually through the end of the decade, and Microsoft should be able to match that pace given its strong market presence.
Here's the bottom line: Microsoft reported revenue growth of 13% in the most recent quarter, and investors can expect similar momentum in the coming years. Indeed, Morgan Stanley expects annual sales growth in the mid-teens for the foreseeable future. But that forecast makes its current valuation of 12.2 times sales look a little pricey, especially when the three-year average is 11.4 times sales.
To that end, I would personally wait for a cheaper multiple before buying this stock, but I wouldn't fault Microsoft bulls for purchasing a small position today.
