AI Cloud Rising! The market has overlooked Microsoft's pressure and underestimated Amazon's potential?
In the AI-driven cloud computing competition, the market's attention is generally focused on growth rates. However, behind this lies an "invisible war" over profit margins: the rapid cloud growth of Microsoft and Google may come at the expense of overall profit margins, while Amazon AWS, despite a slightly slower growth rate, has a high-profit business structure and strong future revenue reserves, which may indicate a healthier long-term profit outlook that the current market has not fully priced in
Microsoft's market value has surpassed $4 trillion, seemingly dimming Amazon's brilliance in the AI race. However, in the AI-driven cloud competition, investors may need to shift their focus from growth rates to deeper profit structures.
The AI cloud competition is not only a contest of technology and growth but also a reshaping of the profit models of tech giants. A recent analysis by The Information points out that in this competition, Microsoft and Google are facing profit margin pressures from the expansion of their cloud businesses, which presents an opportunity for Amazon to enhance its overall profitability, although the market's perception seems to be skewed.
In the latest earnings season, both Microsoft and Google reported accelerated growth in their cloud businesses. In contrast, Amazon Web Services (AWS) reported a modest growth rate of 17% for the quarter, but its business structure reveals a different story. The profitability of AWS far exceeds that of its core e-commerce business, meaning that every growth in the cloud business is structurally optimizing Amazon's overall profits.
The Cost of High Growth: Microsoft's and Google's "Sweet Troubles"
For Microsoft and Google, the strong growth of their cloud businesses is a double-edged sword.
According to the latest quarterly data, Microsoft's "Intelligent Cloud" segment has a profit margin of 40.6%, while its "Productivity and Business Processes" segment, which includes business software, boasts a profit margin of 57.4%. A similar situation is observed at Google, where its cloud business has a profit margin of 20.7%, significantly lower than the 40% profit margin of its advertising-driven "Google Services" segment.
The issue is that the cloud businesses of both companies, despite their lower profit margins, are growing at a much faster rate than their high-margin core businesses. Data shows that Microsoft's cloud business grew by 26% in the quarter, far exceeding the 16% growth rate of its software business; Google's cloud business grew by 32%, also outpacing the 12% growth rate of its services segment.
Analysts believe that as AI further drives enterprises to migrate to the cloud, this trend of "imbalanced growth" will become increasingly evident. In the long run, this means that the overall profit margins of both companies may be "diluted" by the ever-expanding cloud businesses, gradually aligning with the profit margin levels of their cloud operations. Additionally, whether new AI products will erode Microsoft's lucrative enterprise software and Google's search advertising businesses is also a potential risk.
Is Amazon's Potential Underestimated? Cloud Business May Become Profit Engine
Amazon's situation is entirely the opposite. Its cloud business, AWS, is the core engine of the company's profits. In the most recent quarter, AWS's operating profit margin reached 33%, while its massive e-commerce business only had a profit margin of 6.6%.
Historical data supports this trend. From 2017 to 2024, as AWS's share of Amazon's total revenue increased from 9.8% to 17%, the company's overall operating profit margin jumped from 2.3% to 10.7%. The expansion of the cloud business is a key driver of Amazon's leap in profitability.
Although the market is concerned about AWS's 17% growth rate for the quarter, there are signs that its growth may soon accelerate. According to New Street Research analyst Dan Salmon in a report, AWS's backlog (i.e., future orders committed by customers) grew significantly by 25% in the quarter, which is a strong indicator of future revenue Of course, all cloud service providers face a common challenge: the massive capital expenditures required to support AI will increase depreciation costs, thereby putting pressure on the profitability of the cloud business itself. However, the core issue lies in the long-term evolution of the business portfolio. For Google, the market seems to have recognized the profitability risk, as its stock performance has lagged behind advertising peers like Meta. However, based on Microsoft's premium stock valuation, investors seem to selectively ignore the same risks.
As for Amazon, the market may be overly focused on its current growth data while underestimating the future potential indicated by its business reserves and its unique profit growth model
