Over the past twelve months, Amazon (AMZN) has outperformed the broader market, while Microsoft (MSFT) has trailed by a significant margin. In 2024, Amazon’s cloud business (AWS) delivered strong growth despite some volatility, positioning it for continued leadership. Microsoft also saw solid growth in Azure and its cloud services but faced more margin pressures and may have stretched valuations compared to Amazon. Though I’m bullish on both, a closer look suggests Amazon may have a slight edge in continuing to outperform Microsoft through 2025.
Stay Ahead of the Market:
- Discover outperforming stocks and invest smarter with Top Smart Score Stocks
- Filter, analyze, and streamline your search for investment opportunities using Tipranks' Stock Screener
Amazon’s 2025: AWS Powers Growth, But Margin Sustainability Is Key
As a long-term bull on Amazon, I’ve been particularly optimistic ever since CEO Andy Jassy shifted the company’s focus to higher-margin segments like cloud computing. It’s no surprise, then, that AWS is now the most established and profitable division at Amazon, accounting for 74% of the company’s net income over the past nine months. Therefore, the market has increasingly seen Amazon as a hyperscaler, with its e-commerce business taking a backseat.
To put AWS’s growth into perspective, over the past five quarters, its sales growth has accelerated from 12% to 19% in Q3. The big question now is how long this growth can be sustained—and, more importantly, whether the strong margins we’re seeing will hold. I believe this will set the tone for Amazon’s Q4 results and much of 2025.
In the past three quarters, AWS’s operating margins have been solid, though they’ve been a bit volatile: 37.6% in Q1, 35.5% in Q2, and a strong 38% in Q3. Amazon attributes this margin expansion to three key factors: (1) better staffing efficiency, (2) extending the useful life of servers in 2024, and (3) most importantly, higher demand at the top line, which led to improved cost efficiencies and profitability.
Given the still-booming Generative AI demand environment, Amazon expects to spend about $75 billion on capital expenditures for AWS in 2024, with spending likely to increase in 2025. While Amazon’s management acknowledges that margins could fluctuate because of factors like new product investments and staffing changes, they believe AWS will maintain strong margins as long as it continues to balance supply with demand. However, I think it’s reasonable to expect operating margins to come in below 38% at least for Q4 and throughout 2025.
Microsoft’s 2025: Balancing Investments and Margin Pressures
Just like I’m a long-term bull on Amazon, I’m also bullish on Microsoft. The cloud segment has been one of the major drivers behind the company’s nearly 90% gains over the past two years. Currently, Microsoft’s Intelligent Cloud division accounts for about a third of its operating income.
In the last four quarters, revenue from Azure and other cloud services grew from 29% to 33%. However, Microsoft stock has been more subdued recently, struggling to outperform the broader market. A lot of the recent skepticism around Microsoft’s growth story, particularly in relation to AI, has focused on the company’s heavy investments, which haven’t yet translated into improved margins for its most profitable segment: the cloud business. As of Fiscal 2024, Microsoft has spent around $44.5 billion on capital expenditures (CapEx), an increase of over 58% year-over-year.
This concern was amplified by Microsoft’s Fiscal Q1 earnings, where gross margins in the cloud division dropped from 73% to 71%—despite a 22% year-over-year revenue increase. Normally, such revenue growth would be paired with rising margins, but in this case, the company’s significant investments have led to some temporary margin compression. To make matters more challenging, Microsoft has indicated that its CapEx will increase even further in Fiscal 2025 compared to Fiscal 2024.
The key issue I see for Microsoft in 2025 is that if revenue doesn’t continue to grow quickly enough to offset these large investments, margin pressures could persist. This raises questions about the company’s ability to maintain its historical levels of profitability. That said, I think much of this concern may be already priced into the stock for 2025.
A Closer Look on AMZN and MSFT’s Valuations
Both Amazon and Microsoft are likely to maintain solid growth rates in their cloud businesses throughout 2025, even if margins fluctuate, thanks to strong ongoing CapEx investments. However, from a future growth and valuation perspective, I believe Amazon may be one step ahead of Microsoft right now.
Take cash flow, for example—this is especially important considering the massive investments both companies are making in AI. Currently, Amazon trades at a price-to-cash flow (P/CF) multiple of 20.7x over the last twelve months. But if we adjust for the expected 47% growth in operating cash flow over the next two fiscal years, the multiple would be closer to 14x.
On the Microsoft side, the company trades at a P/CF multiple of 25.7x for the past twelve months. When we adjust for the expected 20.4% growth in operating cash flow for the next two Fiscal years, that multiple drops to 21.3x.
Even though Amazon’s multiple is much cheaper, there are good reasons behind Microsoft’s cash flow premium. The higher multiple is likely justified by the company’s diversified revenue streams, best-in-class margins, and exceptional ability to generate free cash flow. That said, Amazon shares many of these same strengths—often at a scale as good as or even better than Microsoft. So, it’s no surprise that the market has favored Amazon stock over Microsoft in 2024, and this trend could very well continue into 2025.
Is AMZN a Good Stock to Buy?
At TipRanks, the consensus among Wall Street analysts for Amazon is overwhelmingly bullish. Out of 47 ratings, 46 analysts recommend buying the stock, while only one is neutral. That said, the upside potential for the next twelve months is relatively modest. The average AMZN price target is $249.62, suggesting an upside of 12.4% from the current price.
Is MSFT a Good Stock to Buy?
For Microsoft, the situation is similar. The consensus is also very bullish, with 27 out of 29 analysts recommending a buy, and just two having a neutral rating. However, the upside potential here is a bit more significant. The average MSFT price target is $503.61, implying an upside of 19.2% from the current price.
Key Takeaway
Amazon and Microsoft have seen a strong rally in recent years, largely driven by the AI boom. However, throughout 2024, concerns around high investments, as well as the challenge of sustaining strong sales growth and margins, have weighed on both hyperscalers giants—though more so on Microsoft. While both companies are likely to continue posting solid growth in 2025, margin fluctuations could lead to greater volatility in the coming quarters.
For this reason, while I’m bullish for the long-term on both, I believe Amazon is better positioned to handle this volatility, thanks to slightly more de-risked valuations.
