Better Buy: Microsoft vs. Amazon
A stock market sell-off in 2022 sent the share prices of some of the world’s most valuable companies plummeting. For example, Microsoftsay (MSFT -0.80%) shares have tumbled 26% year to date, while Amazonsay (AMZN -1.40%) fell by 48% in the same period.
As leading companies in some of the most profitable markets, Microsoft and Amazon are attractive investments amid a selloff. Microsoft has a significant market share in cloud computing, computer operating systems and gaming. Meanwhile, Amazon is the leader in cloud computing and the champion in e-commerce.
As a result, you may be looking at adding at least one of these companies to your portfolio, wondering which is the best buy. So without further ado, let’s take a look at each one.
Despite a share decline in 2022, Microsoft shares have risen 195% over the past five years. The company offers investors a diverse business home to top-performing brands such as Windows, Office, Xbox and Azure, and has expanded its dominance across multiple industries.
Since its CEO Satya Nadella took the reins in 2014, Microsoft has become a true force in the technology world. In fact, the company has seen a compound annual revenue growth rate (CAGR) of 15.4% in the past five years and 12.08% over the past decade.
The company’s primary growth driver has been its cloud computing platform, Azure. The service accounts for the second largest market share in the industry with 21%, just behind Amazon Web Services’ 34%. In its most recent quarter, Microsoft’s intelligent cloud segment rose 20% year-over-year to $20.3 billion, with operating income earning $8.9 billion.
According to Grand View Research, the cloud computing market will grow at a CAGR of 15.7% until at least 2030. And with that, Microsoft could be in a great position to see significant gains over the long term.
Additionally, Microsoft’s Windows operating system has had between 70% and 91% market share since 2013, which has helped the company grow its software and gaming businesses.
With powerful brands and a discount stock, Microsoft makes an excellent long-term investment.
The past year has been challenging for Amazon investors with shares down nearly 50%. Macroeconomic headwinds have hit the company hard over the past year. Its cloud computing business, Amazon Web Services (AWS), accounted for 100% of its operating income in the previous quarter, while its e-commerce business saw earnings decline.
Despite the deep dive in Amazon’s stock this year, investors who bought in five years ago are still up, as the stock is up 52% over the past five years, proving its consistency as a growth stock.
While the e-commerce market may suffer in the coming months, with a recession looming in 2023, the $9 trillion industry is expected to continue growing at a CAGR of 14.7% until at least 2027. Considering that Amazon a leading market share of 37.8% in the e-commerce industry as of June 2022, the company is likely to benefit the most from the market’s continued growth.
Additionally, as the biggest name in cloud computing, AWS is the company’s fastest growing segment. In the third quarter of 2022, AWS revenue grew 27.4% year-over-year to $20.5 billion, while operating income rose 10.6% to $5.4 billion. AWS is incredibly promising for Amazon’s future; despite being the smallest segment, it managed to make up for the $2.89 billion operating loss in the company’s e-commerce segment.
Which should you choose?
Amazon’s long-term outlook is positive. However, when comparing its price-to-earnings ratio of 82 to Microsoft’s more attractive 26, the Windows company offers more value. Furthermore, Amazon’s negative $26.3 billion in free cash flow as of Sept. 30, compared to Microsoft’s $63.3 billion, makes the Xbox maker feel like a safer investment for now.
Both companies are home to robust businesses that have permeated their respective industries, making them exciting long-term investments. However, after a challenging 2022, Microsoft outperformed, making it the superior stock this month and a solid buy.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the listed stocks. The Motley Fool has positions in and recommends Amazon.com and Microsoft. The Motley Fool has a disclosure policy.