The latest earnings season proved one thing with near certainty: the artificial intelligence (AI) boom is alive and well.
Two of the market's biggest tech companies -- Amazon (AMZN 1.52%) and Alphabet (GOOG 1.69%)(GOOGL 1.67%) -- arguably drive this point home the most. With their combined market capitalizations totaling nearly $6 trillion and their cloud computing businesses' customer bases stretching far and wide, it's safe to say that the two giant companies' reports can offer clues about what's happening with AI in the broader market. After all, both companies have massive, fast-growing cloud computing businesses that capitalize on their own internal AI needs and serve other customers' AI computing needs.
If their latest results are any indication, AI is still in the early innings. Not only did both of their cloud businesses report accelerating top-line growth in Q4, but they also guided to significant capital expenditures, which the two companies said would be driven largely by investments in AI-capable computing.
So, if you're looking for good investments to consider to capitalize on companies' seemingly insatiable appetite for AI, look no further.
But which of these two businesses is the better investment?
Image source: Getty Images.
Amazon: A slower-growing yet more established company
Amazon's fourth-quarter sales rose 14% year over year to $213.4 billion. While this was an acceleration from 13% growth, it arguably understates the importance of the acceleration Amazon is seeing. What's most notable about the company's recent revenue growth trends is at the segment level. Amazon's cloud computing business, Amazon Web Services, saw revenue increase 24% year over year to $35.6 billion. This was an acceleration from 20% growth in Q3 and about 18% growth in Q2.
NASDAQ: AMZN
Key Data Points
Highlighting AI's significance as a growth driver for Amazon's key cloud computing business, the 24% year-over-year growth in AWS revenue in Q4 was the fastest the company had posted in 13 quarters.
But what's great about Amazon's business is that its financial momentum is broad-based. Its advertising revenue rose 23% year over year to $21.3 billion, subscription services revenue rose 14% to $13.1 billion, third-party seller services revenue increased 11% to $52.8 billion, and online stores revenue climbed 10% to $83.0 billion.
Even more, Amazon said in its fourth-quarter earnings release that it expects to achieve a "strong long-term return on invested capital" on approximately $200 billion in capital expenditures in 2026.
Alphabet: A faster-growing yet higher-risk tech stock
Alphabet's business is growing faster than Amazon's, but it's more concentrated -- especially in advertising.
In Q4, the company grew revenue 18% year over year as its cloud computing segment, Google Cloud, saw revenue jump 48% -- up from 34% growth in Q3 and 32% in the quarter before that. But Alphabet is still primarily an advertising company. Of its total fourth-quarter revenue of about $114 billion, more than 72% came from advertising. In addition, Alphabet's cloud business is smaller as a percent of the company's overall revenue.
That said, Alphabet's business could offer higher rewards than Amazon's because not only is its cloud business growing much faster than Amazon's, but its consolidated business is growing faster, too. In addition, Alphabet's revenue is derived from higher-margin streams.
NASDAQ: GOOG
Key Data Points
So which stock is a better buy? As for valuation, both stocks are priced similarly. As of this writing, Amazon has a price-to-earnings ratio of 28.6, and Alphabet's is at 28.1. With their valuations so close, I personally prefer the higher-risk but potentially higher-reward option: Alphabet. Its significantly faster growth rate of its cloud computing business has sold me on it. But more risk-averse investors may prefer Amazon.
Though it's worth noting that neither stock is guaranteed to perform well over the long haul. Both companies' big spending plans arguably make both stocks somewhat risky. But if AI proves to be a sustainable revolution, I believe both stocks could do well -- and Alphabet might do slightly better.
