Key Points
The central issue surrounding the AI boom is whether the massive investments being made will ultimately deliver returns. For the two market leaders in cloud computing, the results are evident in their cloud businesses.
Microsoft (NASDAQ: MSFT) operates Azure, while Amazon (NASDAQ: AMZN) runs Amazon Web Services (AWS), the two largest providers of cloud computing capacity and the primary platforms leveraging AI demand for revenue.
Image source: Getty Images.
Microsoft: Azure stays out front on growth
Microsoft’s argument rests on a single metric: Azure and related cloud services posted a 40% year‑over‑year increase in the fiscal third quarter of 2026 (ended March 31, 2026), up from 39% in the prior quarter, keeping Azure ahead of AWS, which continues to grow more modestly.
Furthermore, Microsoft’s cloud portfolio, which extends beyond Azure, generated $54.5 billion in revenue—a 29% increase—and its AI business reached a $37 billion annual run rate, a 123% rise. Commercial remaining performance obligations surged 99% year over year to $627 billion.
Moreover, profitability distinguishes the software giant. Despite substantial AI investment, its operating margin rose to 46.3% in the third fiscal quarter, up from 45.7% a year earlier, and it returned $10.2 billion via dividends and share repurchases.
Nevertheless, the growth narrative involves significant spending. Microsoft forecasts capital expenditures of about $190 billion this year—a 61% increase—and faces margin pressure from rising data‑center depreciation. In April, its OpenAI partnership was restructured, ending Microsoft’s exclusive access to OpenAI technology.
With a price‑to‑earnings multiple of roughly 23, Microsoft appears reasonably valued relative to its growth trajectory. On its fiscal third‑quarter earnings call, CFO Amy Hood noted that Azure is expected to experience modest acceleration in the latter half of the calendar year compared with the first half.
Amazon: AWS reaccelerates, with more behind it
Amazon’s cloud segment is growing more slowly overall, yet it has accelerated markedly in recent quarters. AWS revenue jumped 28% year over year in Q1 2026—the fastest pace in 15 quarters—following a 24% rise in Q4 2025 and a 20% increase in Q3.
“It is rare for a business of this scale to achieve such rapid growth,” Amazon CEO Andy Jassy remarked on the company’s first‑quarter earnings call.
AWS represents the bulk of Amazon’s profitability. The segment generated $14.2 billion in operating income in Q1, accounting for nearly 60% of total operating profit on roughly one‑fifth of revenue, with a margin close to 38%.
Additionally, Amazon’s retail division remains strong, with North American sales rising 12% in Q1. Advertising revenue has surpassed $70 billion over the trailing twelve months.
Notably, AWS’s contracted backlog stands at $364 billion, excluding a recent Anthropic transaction valued at over $100 billion. Amazon’s capital spending to fuel cloud growth is comparable to Microsoft’s, with an estimated $200 billion in expenditures for the year. Free cash flow has fallen to approximately $1 billion over the past year, down from nearly $26 billion.
Valuation-wise, Amazon trades at a higher multiple, with a price‑to‑earnings ratio of about 29.
Which is the better AI cloud stock?
Choosing between the two today, I would favor Microsoft, whose share price has pulled back sharply. Azure’s growth outpaces AWS, and Microsoft’s lower price‑to‑earnings ratio, combined with a strong operating margin near 46% and a dividend, delivers greater profit and cash per dollar invested.
Nevertheless, Amazon remains a solid contender. AWS continues to accelerate, its cloud margins stay robust, and its retail and advertising businesses provide growth avenues not available to Microsoft. Both companies face considerable risks: Microsoft’s margins are under pressure and its OpenAI advantage has weakened, while Amazon’s free cash flow has dwindled. Ultimately, each must demonstrate attractive returns on invested capital from its AI investments.
A shift in my perspective would occur if AWS narrows the growth gap with Azure while Microsoft’s margins deteriorate, potentially reversing the current outlook.