Microsoft and Amazon Are Spending Billions on AI. 1 Is Getting Far Better Returns.

Microsoft (MSFT) and Amazon (AMZN) recently reported stellar quarterly results, both registering impressive growth and pouring staggering sums into artificial intelligence (AI). What the market has continued to wonder is who earns more from all that spending. On cloud growth, Microsoft holds the edge for now. Azure grew 43% last quarter, and the company expects that to increase to 45% next quarter. Amazon’s AWS grew 37% in the most recent quarter, although it remains the larger cloud platform. Microsoft also carries the bigger order book, with a backlog of $678 billion against Amazon’s $496 billion.

The return on spending is where the two really split. Both are investing enormous sums, but Microsoft is getting far more back per dollar. For the full year, Amazon now plans roughly $220 billion in 2026 capex, well ahead of Microsoft’s $190 billion. For the fiscal second quarter of 2026 alone, Amazon invested $53.1 billion against Microsoft’s $41 billion in fiscal Q4 2026.

The difference shows up in the cash each keeps. Microsoft turned its quarter into $19.6 billion of free cash flow at a 45% operating margin — and still returned $10.2 billion to shareholders. In contrast, Amazon’s FCF turned negative in Q2 2026, with an outflow of $7.6 billion over the past year.

Amazon’s answer to that gap is its own silicon. Its in-house chips business — which includes Trainium, Graviton, and related silicon — now brings in more than $25 billion a year. Management expects those chips to save significant costs in future capex while lifting margins. Microsoft still leans more heavily on Nvidia (NVDA). 

The two have also backed rival companies in AI, with Microsoft tied closely to OpenAI and Amazon behind Anthropic. Microsoft's stake in OpenAI is still valuable, but it has lost its exclusive edge, since OpenAI now also sells through rival clouds. Anthropic’s Claude is now one of the most widely used models on Amazon Bedrock, and leans on Trainium chips. So, the bet fills both the cloud and silicon at once. That gives Amazon the better of the model matchup.

In most aspects, though, Microsoft still comes out ahead. It is growing its cloud faster, sitting on a larger backlog, and turning its spending into real cash while Amazon’s free cash flow remains thin. This arguably makes Microsoft the cleaner pick, although Amazon’s custom chips are the wildcard that could shift returns its way. Still, Microsoft is simply spending smarter and getting more back for it today.

Why Microsoft Wins on Valuation

Both Microsoft and Amazon are solidly profitable, but the valuations look considerably different on most measures. In terms of forward price-to-earnings (P/E) ratios, Microsoft is the cheaper of the two, trading at 23.2 times against Amazon’s 30 times forward earnings. Microsoft is also trading at a reasonable discount to its historical norms, with the forward P/E sitting below its five-year average.

The price-to-sales (P/S) ratio looks quite different. Amazon’s P/S ratio of 3.5 times sits far below Microsoft’s P/S ratio of 10 times. However, this reflects what each company sells, not how cheap the stocks actually are. Amazon’s large, low-margin retail business drags its sales multiple down.

The EPS outlook is comparable, but Microsoft does emerge as the steadier of the two firms. Analysts expect Amazon’s earnings to grow 9% in fiscal 2026 and 31% in fiscal 2027. For Microsoft, the growth trajectory keeps gradually improving each year for the rest of the decade, with expected earnings growth of 13% in fiscal 2027, 18% in fiscal 2028, and so on. A look at the balance sheets further tilts things in Microsoft’s favor. The company has a higher market capitalization of $3.4 trillion and is carrying net debt of roughly $47 billion against Amazon’s $92 billion.

For investors, Microsoft seems to be the better value pick today. It is cheaper on earnings, and steadier on both growth and its balance sheet. Amazon on its own isn’t expensive, either. But its story rests a lot more on what the AI buildout delivers years from now.

About Amazon Stock 

Amazon is a global technology and e-commerce company that operates online stores, cloud computing services, digital advertising, and subscription businesses. The firm also manufactures and sells electronic devices, and generates revenue from Amazon Prime subscriptions and media content. Founded in 1994, the company is headquartered in Seattle, Washington. 

AMZN stock climbed 15% in the session after its latest earnings report. Before the rally, the stock had delivered a modest gain in past 12 months, lagging the S&P 500 ($SPX) over the same period. The company’s increased spending on AI infrastructure was one of the reasons for the underperformance. 

Amazon announced its Q2 2026 earnings on July 30. The company reported revenue of $200.6 billion, up 20% year-over-year (YOY). AWS segment revenue was $42.2 billion, up 37% YOY. Record EPS of $5.75 comfortably beat the Wall Street consensus of $1.81 per share. CFO Brian Olsavsky said the company’s cash capex was $53.1 billion, primarily relating to AWS and generative AI. 

Following earnings, analysts updated their financial models and issued new price targets for AMZN stock. On July 31, Jefferies analyst Brent Thill reiterated a “Buy” rating and assigned a price target of $330. Based on 57 analysts with coverage, Amazon carries a consensus “Strong Buy” rating on Wall Street. The mean price target of $314.48 implies potential upside of 11% from current levels. 

About Microsoft Stock 

Microsoft is a global technology company that develops and sells a wide range of software, cloud services, devices, and business solutions, serving both individual users and enterprise customers worldwide. The company's flagship products include Windows, Microsoft 365, Azure, LinkedIn, and Xbox. Microsoft was founded in 1975 and is headquartered in Redmond, Washington. 

Over the last 12 months, MSFT stock has dropped 7%, underperforming the S&P 500’s rise during the same period. Microsoft hit its 52-week high in October 2025 but started falling after that. The underperformance has continued this year as well, with shares up 1% year-to-date (YTD) versus the S&P 500's gain of 11%.

Microsoft announced its fiscal Q4 2026 earnings on July 29. The company beat expectations on both profit and revenue, with EPS of $4.81 coming in above Wall Street estimates. Revenue of $90 billion was up 18% YOY, while gross margin fell to 67% due to a mix shift and AI infrastructure spending. Cash flow from operations was $55.4 billion, up 30% YOY, while free cash flow stood at $19.6 billion.

Looking ahead, Microsoft expects double-digit revenue and operating income growth in fiscal 2027. For Q1, management guided revenue of $89.85 billion to $90.95 billion, implying growth of 16% to 17%. Moreover, CFO Amy Hood said that management expects 45% revenue growth in Azure.

On July 30, William Blair analyst Jason Ader reiterated a “Buy” rating on MSFT stock following earnings. Accelerating cloud and AI momentum were a few reasons for the bullish sentiment. Based on 51 analysts with coverage, Microsoft has a consensus “Strong Buy” rating overall. The average price target of $547.45 implies potential upside of 12% from current levels.