Investors Are Worried About Too Much AI Spending. They're Not Wrong, But It's Paying Off for These 2 Tech Stocks.
Microsoft and Amazon have accelerated their cloud revenue thanks to AI spending.
Investors are expressing concern over the substantial amount of money being poured into artificial intelligence (AI) infrastructure, but they might be overlooking the potential benefits. According to S&P Global, AI companies have already spent hundreds of billions of dollars on capital expenditures (capex) this year and could surpass $1.3 trillion by 2027.
While many see AI spending as a gamble to stay ahead in the AI race, not all of it is destined for failure. Some tech stocks are already reaping the rewards of their AI investments, and two such companies are Microsoft (MSFT) and Amazon (AMZN).
Both Microsoft and Amazon have significantly increased their AI-related capex this year. Microsoft plans to spend $175 billion on its Azure cloud service, up 41% from the previous year, while Amazon allocated $220 billion to AI-related capex, with most of it going toward AI. Amazon's cloud computing business, Amazon Web Services (AWS), leads the market with 28% market share.
Its annualized revenue run rate is currently $169 billion, and CEO Andy Jassy projects it could reach $600 billion within a decade. With AWS generating $16.6 billion in operating income, the potential for a positive return on AI investment appears promising.
Microsoft's Azure cloud service is a strong competitor to AWS, with an annualized revenue run rate of $100 billion, up 41% from the previous year. Azure's demand continues to exceed capacity, indicating more room for growth. Microsoft's intelligent cloud segment, which includes Azure, accounts for around 44% of total sales. The company's management expects Azure revenue to increase by 45% in fiscal 2027.
Another crucial factor for Microsoft's AI stock is its Copilot AI agent software, which has over 30 million paid seats, a 50% increase in just a few months. As AI agents become more prevalent, Microsoft's dominance in enterprise software positions it to attract more users, offering a comprehensive ecosystem of AI agents, cloud services, and enterprise software. This potential advantage gives Microsoft an edge over Amazon, making it a more compelling investment choice.
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