Both Microsoft (MSFT +4.93%) and Amazon (AMZN +4.58%) are coming off blistering earnings reports that helped revive interest in both stocks after a tough year, though more so for Microsoft.
Microsoft and Amazon are two of the largest companies in the world by market cap, helping fuel the artificial intelligence revolution by making hundreds of billions in capital expenditures. This level of investment has drawn the ire of the bears, who are concerned that strong returns on such investments may not materialize.
Which stock does Wall Street think has more upside?
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Microsoft: Starting to find its AI groove
Investors have been bearish on Microsoft for a few reasons. First, they were concerned that the company's artificial intelligence assistant, Copilot, was not gaining enough traction, especially since Microsoft had made it a core part of its AI strategy.
Microsoft was also penalized during the software sell-off due to concerns that Microsoft 365 might lose some of its competitive moat, based on the belief that AI could replicate software products much more quickly than in the past.
But Microsoft has shown that its AI strategy is gaining traction. Paid Copilot subscribers rose by 10 million in the quarter to reach 30 million total. That's double the net added subscribers in the prior quarter.
Furthermore, the company's Azure cloud division, Microsoft's cloud computing division, saw revenue surpass $100 billion for the first time, which is up a whopping 43% year over year. That showed investors at least some evidence that Microsoft's capex is starting to pay off.
NASDAQ: MSFT
Key Data Points
Of the 35 Wall Street analysts who have issued research reports on Microsoft during the past three months, 34 have buy ratings on the stock, with one recommending a hold. The average price target implies nearly 21% upside, according to TipRanks.
Following the quarter, Goldman Sachs analyst Gabriela Borges maintained a buy rating on the stock and raised her price target by $30 to $640. In a research note, Borges called the quarter an inflection point for the company that addressed investor concerns.
Not only are the company's AI products resonating with customers, but the AI business is becoming more profitable. While inflation has increased the company's AI investments, the company has maintained its long-term margin goals, Borges wrote.
I would agree that, given where the stock has traded this year, any signs that the company's AI strategy is working make the stock a buy. Although Azure stole the show, progress on Copilot was a meaningful step as well.
Amazon: AWS posts its strongest growth in 18 quarters
Similar to Microsoft, Amazon's cloud business, Amazon Web Services, also stole the show in the quarter.
AWS's revenue of $42.2 billion beat analyst estimates by nearly $1.7 billion and grew 37% year over year. It was the division's fastest growth in 18 quarters.
The company also hiked its full-year capital expenditure projection to $220 billion, largely due to surging memory costs. Chief Executive Officer Andy Jassy doesn't see AWS slowing down any time soon.
"Even at that amount [of capex], we will still not have enough capacity to meet all the demand we have in 2026, and I believe this dynamic will also be true in 2027, too. In fact, the demand we already have for 2028 is striking," he said on the company's earnings call.
NASDAQ: AMZN
Key Data Points
Of the 38 Wall Street analysts who have issued research reports on Microsoft during the past three months, 37 have buy ratings on the stock, with one recommending a hold. The average price target implies roughly 23% upside, according to TipRanks.
Benchmark analyst Daniel Kurnos recently maintained a buy rating on the stock and raised his price target by $30 to $400, implying about a 40% gain from recent levels. Kurnos believes Jassy made the strongest case for why investors must own the stock over the next decade to capitalize on the AI revolution.
Kurnos estimates the stock trades at about 10 times the company's operating income before depreciation and amortization.
As you can see, Wall Street has similar sentiment for both Microsoft and Amazon, given the similar upside scenarios. I also think both stocks are buys right now, with evidence that their big capex sprees are not on a whim.
Both have embedded risk, particularly if the AI investment doesn't pay off. But I also expect both could navigate a difficult environment and generate strong long-term returns for investors.
