The Seattle-based battle between Amazon and Microsoft for dominance of the cloud services industry has been competitive for a long time.
After all, Amazon CEO Andy Jassy helped create the cloud services business by launching Amazon Web Services and Microsoft CEO Satya Nadella started and led Azure — AWS’ biggest rival.
While Amazon has dominated the industry for more than a decade, AWS is growing far more slowly than Microsoft’s Azure cloud infrastructure unit.
If current trends continue, Azure could be the industry leader by 2026. Underlying Azure’s rapid growth is the payoff from Microsoft’s estimated $13 billion investment in OpenAI.
On Amazon’s fourth-quarter earnings call, Jassy said AWS offers “the most expansive collection of compute instances with Nvidia chips,” according to CNBC. He added AWS customers including Airbnb and Snap “are using its homegrown AI processors.”
Microsoft says customers are using Generative AI in their products. “We now have 53,000 Azure AI customers,” Nadella told analysts on the company’s earnings call. CFO
To be sure, early adopters of Microsoft’s AI-powered Copilot are lukewarm. Testers have questioned whether Copilot is worth $30 per month per user. How so? “The shortcomings with software including Excel and PowerPoint and its tendency to make mistakes have given some testers pause,” noted the Wall Street Journal.
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Despite Microsoft’s superior performance in cloud services and its faster revenue growth and higher profitability, Amazon stock has outperformed Microsoft and is forecast to rise faster in 2024.
Although Microsoft’s stock market capitalization of $3.08 trillion is nearly $1.3 trillion more than Amazon, I am a little surprised analysts expect a bigger gain in Amazon stock for 2024.
How Azure Could Overtake AWS By 2026
Azure could take over the cloud services lead from AWS by 2026.
However, in the fourth quarter of 2023, AWS was still the leader. AWS lost two percentage points of market share to 31% while Azure added two percentage points to 24%, according to CRN.
Before examining the assumptions leading me to conclude Azure could topple AWS, it is worth emphasizing that the two businesses are far from identical. Azure is part of Microsoft’s Intelligent Cloud segment.
Intelligent Cloud offers cloud infrastructure services, application software, and other services. These include basic computing and storage, databases and monitoring tools. commercial Office subscriptions, the commercial part of LinkedIn and Dynamics 365 enterprise software, according to CNBC.
AWS primarily consists of computing tools. Its products include “compute, storage, databases, analytics, networking, mobile, developer tools, management tools, IoT, security, and enterprise applications,” according to AWS.
Microsoft does not break out Azure revenue in its financial reports. However, analysts estimate that in 2019 Azure half the size of AWS. “Now, it’s about three-quarters the size of its top rival,” CNBC reported. Moreover, in the most recent quarter, AWS grew 13% while Azure revenue increased by 30%, noted CNBC.
I estimate by 2026 Azure could generate more revenue than AWS — based on the following assumptions:
- Azure 2023 revenue: $68.1 billion (75% of AWS’ $90.8 billion in 2023 revenue, according to Statista).
- Azure and AWS revenue growth rate assumptions: 30% and 13% respectively from 2024 to 2026. I assumed the most recent growth rates would continue — which could underestimate Azure’s revenue growth since Loop Capital analyst Yun Kim expects Generative AI initiatives and new cloud deployments to accelerate Azure’s revenue growth next fiscal year, CNBC reported.
- 2026 Azure revenue: $149.6 billion — exceeding AWS’ estimated 2026 revenue by $18.6 billion, according to my model.
Microsoft — which has been working on GenAI for many years — has added graphics processing units to its data centers so that clients can run AI models such as GPT-4 in Azure. Jamin Ball, partner at investment firm Altimeter Capital, said some companies are considering Azure due to Microsoft’s perceived lead due to its “close relationship with OpenAI,” noted CNBC.
AWS has been playing catch-up when it comes to Generative AI. AWS “took months to come out with a model that could go up against GPT-4,” according to CNBC. AWS offers other models — including one from Anthropic, which Amazon backed.
Why Microsoft Is Growing Faster And More Profitable Than Amazon
Microsoft is growing faster and earning more profit than Amazon and that growth advantage is expected to continue in the current quarter.
Here are the key numbers:
- Revenue growth: 4 percentage point advantage to Microsoft — up 18%, according to the company’s Q2 earnings release versus Amazon’s 14%, according to its Q4 2023 news release.
- Net margin: 24.8 percentage point advantage to Microsoft — (31%) vs. Amazon (6.2%), according to their respective news releases.
- Q1 2024 Revenue growth forecast: 3.9 percentage point advantage to Microsoft — 14.4% Q1 growth forecast vs. 10.5% for Amazon, according to CNBC.
At a high level, Microsoft’s faster growth and higher profitability can be explained by its relatively asset-light business model. After all, Amazon owns warehouses and a transportation network for an e-commerce business that ships goods all over the world.
While Microsoft operates data centers to support its software as a service businesses, the giant company is relatively free of physical assets and employed far fewer people at the end of 2023 — 221,000 versus 1.5 million for Amazon — according to Statista.
Why Amazon Stock Will Continue To Outpace Microsoft Stock
Despite faster growth, higher profitability, and Azure market share gains, Microsoft’s stock has lagged Amazon’s. Specifically, in 2023 Microsoft stock rose 57% while Amazon enjoyed a 77% rise in its share price.
The Amazon advantage has continued into 2024 — as of February 13, Amazon stock was up 10% in 2024, compared to an 8% increase for Microsoft’s stock.
Investors expect Amazon stock to get the edge in 2024. The 51 analysts who cover Microsoft set a median price target of $465 per share, according to CNN Business, representing a 12% increase. Amazon stock is expected to rise 19% to $205 a share — the median price target of 60 analysts who cover the company, noted CNN Business.
If the software giant begins to report expectations-beating revenue gains from its Generative AI business — in October 2023 analysts estimated Copilot could add $30 billion to the company’s revenue — perhaps analysts will raise their price target for the software giant’s stock.
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