The wave of generative artificial intelligence (AI) is boosting prospects for companies across a range of technology categories, including semiconductor manufacturers, cloud computing providers, and cybersecurity companies. Cloud computing companies, in particular, are seeing robust demand for the services required to help businesses and developers build generative AI models.
With this favorable backdrop in mind, we used TipRanks’ stock comparison tool to compare Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL) to determine which cloud computing companies are the best AI stocks and could offer the best returns from current levels, according to Wall Street analysts.
Microsoft (NASDAQ:MSFT)
In the cloud infrastructure market, Amazon Web Services (AWS) remains the market leader, while rival Microsoft Azure is fast catching up: In the March quarter (which was FY24 Q3 for MSFT), revenue from Azure and other cloud services grew 31%, while AWS’s revenue growth in the quarter was 17%.
Microsoft CEO Satya Nadella said during the company’s fiscal third-quarter earnings call that Azure is gaining market share and that customers are using the company’s platform to build AI solutions. He added that the company offers a range of AI accelerators, including the latest offerings from Nvidia (NVDA), AMD (AMD), and MSFT’s own AI chips.
Thanks to its ongoing AI innovation, backed by a strategic partnership with ChatGPT developer OpenAI, Microsoft claims that over 65% of Fortune 500 companies use Azure OpenAI services. Overall, Microsoft’s cloud business is seen as one of the company’s key growth drivers.
Microsoft: Buy or Sell?
Microsoft is scheduled to report its fourth-quarter fiscal year 24 results on July 30. Analysts expect the company’s adjusted earnings per share (EPS) to increase 9% year over year to $2.93.
Ahead of the earnings release, TD Cowen analyst Derrick Wood reaffirmed his buy recommendation on MSFT shares and raised his price target to $495 from $470. The analyst expects the company to deliver another strong quarter in growth and margins. He is optimistic about Azure’s potential, and data points point to continued accelerated growth. Overall, MSFT remains “best positioned for AI monetization,” Wood said.
Microsoft shares have 34 buy recommendations and one hold recommendation, giving the stock a consensus rating of Strong Buy. The average price target for MSFT is $504.12, implying a 15.3% upside from current levels. The stock has risen more than 16% so far this year.
Amazon (NASDAQ:AMZN)
Despite increasing competition, Amazon’s AWS division continues to maintain its dominant position in the cloud computing market: According to Synergy Research Group, AWS is expected to capture 31% market share of the cloud infrastructure services market in the first quarter of 2024, compared to Microsoft Azure and Google Cloud, which have market shares of 25% and 11%, respectively.
The story continues
In Q1 2024, AWS revenues reached $25 billion, up 17% year over year. This growth rate accelerates compared to 13% growth in Q4 2023. It’s worth noting that AWS is a key growth engine for Amazon and is highly profitable. In Q1 2024, AWS accounted for 17.5% of total revenues, but contributed more than 61% of the company’s operating income.
Amazon is optimistic about the strong potential of its AWS business: CEO Andy Jassy said during the company’s first-quarter 2024 earnings call that the company sees significant momentum in AI and has already built up “billions of dollars in revenue margins.”
What is your price target for Amazon stock?
Ahead of Amazon’s second-quarter earnings, scheduled for release on August 1, Morgan Stanley analysts have reaffirmed their buy recommendation on the stock, citing a positive near-term outlook. Morgan Stanley expects AMZN to report significantly better-than-expected EBIT in the second quarter and issue strong guidance for the third quarter.
Notably, Morgan Stanley’s EBIT forecast is 17% higher than the market consensus for Q2 and 10% higher for Q3. The optimistic outlook is based on the profitability of AMZN’s North American retail business and accelerating growth in AWS. Meanwhile, Wall Street expects Amazon’s EPS to increase to $1.02 from $0.65 in the year-ago quarter.
Amazon shares have a Strong Buy consensus rating based on 44 unanimous Buys. The average price target for AZMN is $223.05, suggesting upside potential of about 22%. The stock has risen 21% year to date.
Alphabet (NASDAQ:GOOGL)
Technology giant Alphabet is best known for its Google search engine, but its fast-growing Google Cloud business has captured Wall Street’s attention. Alphabet impressed investors with strong first-quarter results, driven by a significant improvement in Google Cloud profitability.
In Q1 2024, Google Cloud’s revenue grew 28.4% year over year to $9.57 billion, while operating income surged to $900 million from $191 million in the same period last year. The results reflect Alphabet’s increased investment in its cloud business. Interestingly, in the Q1 2024 earnings call, management highlighted that the company has introduced over 1,000 new products and features in its cloud business over the past eight months.
The company believes one of the things that differentiates its cloud business from competitors is its AI hypercomputer, which provides a cost-effective and efficient infrastructure for training and supporting AI models.
Is this a good time to buy GOOGL?
On July 18, analysts at Jefferies reaffirmed their buy recommendation on GOOGL shares, setting a target price of $220. The analysts expect Alphabet to report strong second-quarter results, buoyed by strong customer spending and a stable cloud business. However, Jefferies warned investors that second-quarter comparisons will be somewhat tougher, primarily in the advertising business.
GOOGL shares have seen a solid rise (up 27.2%) so far this year, and Jefferies expects them to continue to rise, but at a more moderate pace, due to strong first-quarter results and high expectations above historical average valuation levels.
Alphabet will report its second-quarter 2024 earnings on July 23. Wall Street expects Alphabet’s second-quarter EPS to rise 27% to $1.83.
Wall Street has a Strong Buy consensus rating on GOOGL shares based on 33 Buys and 6 Holds. The average price target for GOOGL shares is $202.89, indicating a potential upside of 14.2% from current levels.
Conclusion
Wall Street is bullish on the long-term growth potential of the top three cloud computing companies, buoyed by the continued enterprise migration to the cloud and AI-related tailwinds. Currently, Wall Street sees slightly higher upside potential in Amazon shares than in Microsoft and Alphabet stocks. Apart from the attractive growth potential of its AWS business, analysts’ optimism for Amazon is also supported by the company’s e-commerce leadership and growing advertising business.
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