Cloud computing is one of the most exciting industries to invest in right now. While it may sound like a legacy business, the reality is that heightened artificial intelligence (AI) demand has resulted in a booming cloud computing business, and the big three cloud computing providers are feeling it.
Alphabet's (GOOG 0.95%) (GOOGL 0.82%) Google Cloud, Microsoft (MSFT 2.55%) Azure, and Amazon (AMZN 2.93%) Web Services (AWS) make up the big three, but which one is the best buy now?
Image source: Getty Images.
Cloud computing is capitalizing on the AI boom
I'll start off by mentioning that I like all three as long-term investments. Cloud computing will be a major, long-term beneficiary of the build-out, and these three will see a major business transformation a decade from now. It's a fairly simple business: Cloud computing providers build out excess computing capacity, then rent it out to those who need it.
Cloud computing products range from storage to central processing units (CPUs) for running business tasks, all the way to dedicated AI chips like graphics processing units (GPUs) and to custom options for training and running AI models. The latter has caused each of their businesses to boom and is what will leave a lasting impact on them.
NASDAQ: GOOGL
Key Data Points
Cloud computing often operates on a consumption model, so clients pay for what they use. With AI, there are millions of processes going on at once, and new models will need to be trained as new and updated training sets become available.
There's also the continual cost of just running inference on a model, which will result in a massive recurring revenue stream for cloud computing providers. So, a decade from now, when the AI computing footprint is mostly complete, the cloud computing providers will be the ones cashing in on the long-term run rate.
This is a fairly clear bull case for cloud providers, but which makes for the best investment now?
Cloud computing is a side business for all but one
Alphabet, Microsoft, and Amazon didn't become famous for cloud computing; they already had strong, established businesses to support their cloud endeavors. However, all of that could flip a decade from now, where there is a massive AI-related revenue stream. Amazon, though, is already a majority cloud business.
While AWS doesn't make up the lion's share of Amazon's revenue, it accounted for 59% of operating profits in the last quarter. That trend has been around for several years, so Amazon has already become a cloud-first company, at least from a profit perspective. With its cloud business growing far faster than its commerce business (North American and International sales rose 12% and 19%, respectively, in the first quarter, while AWS increased at a 28% clip), Amazon looks like the frontrunner right now.
NASDAQ: AMZN
Key Data Points
Microsoft doesn't provide information about the profitability of Azure, but it does let investors know its growth rate, which was 40% in its latest quarter. Azure has grown to become a major part of Microsoft's business, but the company doesn't break it out as much as Amazon and Alphabet do. This makes it a lot harder to analyze, but with a growth rate like that, it's sure to be a major part of Microsoft's financial picture.
NASDAQ: MSFT
Key Data Points
Lastly, Google Cloud is the fastest-growing of the three. Its revenue rose 63% year over year in Q1, but it had some help. Alphabet has designed a custom AI chip, known as the Tensor Processing Unit (TPU), that can provide better training and inference cost per token versus traditional GPU-based AI computing. Alphabet is starting to sell these proprietary TPUs to external clients, which is boosting its growth rate. Amazon also has a custom AI chip, but that part of the business isn't nearly as large as Google's.
So, which of the three makes for the best buy? I think it's Amazon. While it's the slowest-growing, its growth rate is picking up, and AWS already generates the majority of Amazon's operating profit -- meaning cloud tailwinds flow more directly to the bottom line than they do for Microsoft or Alphabet.
Furthermore, Alphabet's cloud growth will have a greater impact on its business than Microsoft's. While I'm still bullish on the future of all three, Amazon looks like the top dog today.
