Why Now Is Finally the Time to Buy the Big Three Cloud Computing Stocks Before It's Too Late
Amazon, Microsoft, and Alphabet's cloud computing stocks are undervalued due to investors' concerns about their AI infrastructure spending. However, Amazon CEO Andy Jassy's comments on the economics of the cloud business model have convinced the market of the lucrative re…
Intelligence analysis by Llama
The big three cloud computing providers have seen their stocks languish during the AI bull market due to concerns about their AI infrastructure spending. However, Amazon CEO Andy Jassy's comments on the economics of the cloud business model have convinced the market of the lucrative returns on this spending, making all three cloud computing stocks look like buys right now.
Imagine you have a big factory that makes lots of things, but you also have a special machine that helps you make those things faster and cheaper. That's kind of like what Amazon, Microsoft, and Alphabet are doing with their cloud computing businesses. They're making lots of things, like storing and processing data, and they're also using special machines, like custom AI chips, to help them do it faster and cheaper. This is making their businesses very profitable, and that's why it's a good time to buy their stocks.
Analysis
A $60B Vote of Confidence
The big three cloud computing providers, Amazon, Microsoft, and Alphabet, have seen their stocks languish during the AI bull market due to concerns about their AI infrastructure spending. However, Amazon CEO Andy Jassy's comments on the economics of the cloud business model have convinced the market of the lucrative returns on this spending. Jassy explained that Amazon breaks even on its AI chip and networking investments in two to three years, while their useful life is between five and six years. This means that the company can lock in huge investment returns on this spending. The market is finally starting to realize this, which is why all three cloud computing stocks look like buys right now.
Why Cursor?
Amazon's cloud unit, AWS, has been one of the most consistent growers, with revenue surging 37% in the second quarter. This was a big acceleration from the 28% growth it produced in Q1 and the 24% growth it generated in Q4. Meanwhile, AWS operating income skyrocketed 63% to $16.6 billion, with the business showing strong operating leverage as it began using more of its custom chips. Its backlog also more than doubled to $496 billion. Amazon has a nice cost advantage with its custom Trainium AI accelerators and its Graviton CPUs, which helps it reduce inference and other costs. It also sells these chips to customers, which has become a $25 billion revenue run-rate business.
The Road Ahead
Microsoft was really the first cloud company to embrace AI through its partnership and investment in OpenAI. With privileged access to OpenAI's large language models, Microsoft's cloud unit, Azure, has been one of the most consistent growers. Azure has grown its revenue by 30% or more each quarter over the past three years, including 43% last quarter. Meanwhile, it expects Azure revenue to accelerate to 45% growth next quarter. Microsoft also has the largest backlog of the big three cloud providers. Its bookings grew by 84% year over year to $678 billion, and it expects to realize about 30% of that as revenue over the next year. While commitments from OpenAI account for a large chunk of that total, impressively, the company said that the entire $50 billion in sequential backlog growth it saw came from non-frontier model companies.
Key points
- Amazon CEO Andy Jassy's comments on the economics of the cloud business model have convinced the market of the lucrative returns on the AI infrastructure spending of these companies.
- Amazon's AWS has been one of the most consistent growers, with revenue surging 37% in the second quarter.
- Microsoft's Azure has been one of the most consistent growers, with revenue growing by 30% or more each quarter over the past three years.
- Alphabet's Google Cloud saw the strongest growth of the big three cloud companies, with its revenue surging 82% to $24.8 billion last quarter.
If the market continues to realize the lucrative returns on the AI infrastructure spending of these companies, their stocks could see significant growth. Amazon's AWS could become a $1 trillion revenue business, making it a top stock to own. Microsoft's Azure has been one of the most consistent growers, and its largest backlog of the big three cloud providers makes it a strong contender. Alphabet's Google Cloud saw the strongest growth of the big three cloud companies, with its revenue surging 82% to $24.8 billion last quarter.
However, there are also risks associated with investing in these companies. The AI infrastructure spending of these companies is a significant expense, and if the market becomes concerned about the returns on this spending, their stocks could see a decline. Additionally, the companies are also facing increased competition in the cloud computing market, which could impact their growth.
