Should Investors Buy Microsoft Stock Instead of Amazon Stock? | MSFT Stock vs. AMZN Stock

SUMMARY

Parkev Tatevosian, CFA, offers a detailed comparison of Microsoft and Amazon, focusing on revenue growth, profitability, and valuation metrics. He ultimately concludes that while both companies are strong investments, Microsoft currently presents a more compelling case for long-term investors.

MAIN POINTS

• Amazon and Microsoft are both investing heavily in artificial intelligence, prompting a comparison of their long-term investment potential. [0:00]
• Microsoft's revenue growth rate is accelerating, while Amazon's is decelerating due to its large revenue base. [1:01]
• Microsoft has historically achieved higher returns on invested capital, largely due to its focus on higher margin businesses. [2:02]
• Amazon's recent capital allocation toward its AWS data center segment is expected to improve its profitability and narrow the gap with Microsoft. [3:01]
• Valuation analysis shows Amazon is more expensive than Microsoft on a forward price-to-earnings basis, but appears more undervalued using discounted cash flow models. [4:01]
• Despite both companies being rated as top buys, Microsoft is identified as the better investment choice at present. [5:01]

DETAILED ANALYSIS

Amazon and Microsoft are two of the largest technology companies, each investing substantial sums into artificial intelligence and data center infrastructure. Over the past five years, Amazon's compounded annual revenue growth rate has slowed, a trend attributed to its already massive revenue base of approximately $700 billion. In contrast, Microsoft, with a smaller overall revenue, has seen its growth rate accelerate, recently achieving a 14.5% annual increase compared to Amazon's 13.2%.

This divergence highlights Microsoft's ability to sustain higher growth from a smaller base, while Amazon faces the challenge of expanding an already vast operation.

Profitability, as measured by return on invested capital, has historically favored Microsoft by a significant margin. Microsoft's business model is more concentrated in high-margin segments, which has contributed to its superior returns. Amazon, on the other hand, has traditionally allocated capital to its logistics and e-commerce operations, areas characterized by lower margins and high capital intensity.

However, a strategic shift in recent years has seen Amazon direct more investment toward its AWS cloud division, a segment with higher profitability. This change is expected to improve Amazon's returns on invested capital over the next decade, potentially closing the historical gap with Microsoft.

Valuation presents a nuanced picture. On a forward price-to-earnings basis, Amazon trades at a premium, with a multiple of 32 compared to Microsoft's 22, making it roughly 50% more expensive. When assessed through a discounted cash flow model, Microsoft appears slightly undervalued at a market price of $409 versus an intrinsic value of $419, while Amazon is also undervalued, trading at $267 against an intrinsic value of $297.

These differing outcomes underscore the importance of valuation methodology in investment decisions.

Ultimately, both companies are regarded as strong long-term investments and are included among the top 15 stocks to buy. However, given current growth trends, profitability, and relative valuation, Microsoft is identified as the more attractive option for investors seeking a single choice between the two.

LINKS

• YouTube channel membership for exclusive perks and early access.
• Special offer for The Motley Fool Stock Advisor.
• Parkev Tatevosian's book on stock evaluation.
• Fiscal.ai investment research platform with a discount for viewers.
• Webull investing platform with bonus shares offer.
• Subscription link for Parkev Tatevosian's free monthly newsletter on Substack.

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