One of the areas that has most benefited from the advent of artificial intelligence (AI) has been cloud computing. As organizations look to customize AI models and applications to fit their needs, they has been increasingly turning to these companies to help them.
Let's look at the three big companies that dominate this industry.
Amazon
Amazon (AMZN -0.22%) created the cloud computing industry back in 2006 when it launched Amazon Web Services (AWS) as way to help partners and affiliates get their server infrastructure up and running more quickly in order for them to launch their own e-commerce platforms. Today, the company holds about a 31% market share in the cloud computing space and AWS is the company's largest business by profitability.
AWS has been Amazon's fastest-growing business as well, with revenue growth of 19% last quarter to $27.5 billion. Meanwhile, the segment's operating income soared nearly 49% to $10.4 billion. It noted that AI-related revenue soared by triple digits.
The company has been seeing success with its Bedrock and SageMaker solutions. Bedrock provides customers with an array of foundational AI models they can use as a starting point, while SageMaker lets them build and train their AI models and then helps move them into production. Amazon also has developed its own custom AI chips for AI training and inference.
Outside of cloud computing, Amazon is the leading e-commerce and logistics company is the world. Its e-commerce continues to be a solid growing business, while it is using AI to help run the business more efficiently.
The stock currently trades at a forward price-to-earnings (P/E) ratio of just under 29 times next year's analyst estimates, which is a discount to where it has traded at in past years. The company has always shown a willingness to spend money to win, and with AI and cloud computing it should be no different.
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Microsoft
Microsoft (MSFT -0.42%) was one of the first big tech companies to embrace AI through its large investment and partnership with OpenAI. The unit that has most benefited from this partnership has been Azure, which is the number-two leading cloud computing company with a 20% market share.
Last quarter (fiscal Q1), Azure revenue climbed 33%, with it saying Azure OpenAI usage doubled in the past six months. The company has credited its strong growth to customers building their own AI agents and copilots on the Azure platform, with growth accelerating as it helped move customer apps from test to production. In addition, this is leading to more usage of its data and analytics services, Azure Cosmos DB and Azure SQL DB.
Microsoft said that Azure's revenue growth could have been even more if not for capacity constraints, and it expects revenue to accelerate in its fiscal second half as more capacity comes online. The company is aggressively investing in adding AI infrastructure, recently saying it would spend approximately $80 billion on new AI data centers in 2025.
Beyond the cloud, Microsoft is the leader in workplace productivity software with programs such as Word, Excel, and Outlook, as well as in personal computer (PC) operating systems with Windows. The company has a large opportunity with its AI assistant copilots, which it sells as a $30 per month per enterprise user add-on to its Microsoft 365 subscription. These copilots can greatly help increase worker efficiency and save time.
The stock currently trades at a forward P/E of just under under 32 times this year's fiscal (ending June 2025) analyst estimates, which is a reasonable valuation given the opportunities in front of it.
Alphabet
While Alphabet's (GOOGL -0.54%) (GOOG -0.46%) Google Cloud is the smallest of the big-three cloud computing companies with a 12% market share it has been the fastest growing. Last quarter, the unit grew revenue by 35% to $11.4 billion. More importantly, the business has seen a profitability inflection point, with its segment operating income soaring from $266 million a year ago to $1.95 billion last quarter.
Similar to the other big cloud computing companies, Alphabet said its cloud computing growth is being driven by customers using its AI platform to build and customize their own AI models and applications using both Gemini and third-party foundational models. It noted that Gemini API (application programming interface) requests have surged 14x over the past six months. It also called out the traction it was seeing with AI in its BigQuery data platform and AI-powered cybersecurity solutions.
It has also been able to lower costs and reduce processing times through its use of combining its customized TPUs (tensor processing units) with graphic processing units (GPUs). On its last earnings call, it highlighted that one customer was able to lower its costs by 72% and processing times by 50%.
Outside of cloud computing, Alphabet is the leader in digital advertising through its Google search engine and YouTube streaming platform, which is the most-viewed video platform in the world. The company also is helping lead the way in a variety of fields, including autonomous driving (Waymo), AI video generation (Veo 2), and quantum computing (with its Willow chip).
The stock is attractively priced, trading at a forward P/E of just under 18.7 times next year's fiscal analyst estimates. Given the opportunities in front of the company, that looks like a bargain.
