What happened
Amazon, Microsoft, and Alphabet are the big three hyperscalers renting cloud computing power for AI workloads. The author says Amazon and Alphabet are smart buys, while Microsoft is the one to avoid.
Why it matters
Alphabet's Google Cloud is the fastest-growing, with Q2 revenue up 82% year over year and operating margin up from 21% to 36%. Amazon's AWS growth accelerated from 28% in Q1 to 37% in Q2, while Microsoft's Azure stayed around 40-43%, which the author sees as a red flag.
What to watch
Whether Azure can reaccelerate is the key test, since the author sees its stalled growth as a red flag while rivals accelerate. Watch for whether Google Cloud’s 82% and AWS’s 37% Q2 gains widen the gap further.
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The three hyperscalers are spending hundreds of billions on data center capital expenditures this year and likely in 2027, fueling their cloud growth. Alphabet stands out with Google Cloud's 82% revenue jump in Q2, up from 63% in Q1, and its operating margin improved to 36%. Amazon's AWS also shows momentum, with growth rising from 28% to 37% between quarters, whereas Microsoft's Azure remains around 40-43%.
This divergence in growth trajectories is central to the author's stock picks. While Microsoft trades at the cheapest valuation based on operating income, the author argues that accelerating growth in AWS and Google Cloud signals stronger market share gains, which may be more valuable over the next few years as AI demand continues. The author hedges that a one-off quarterly issue could explain Azure's stagnation, but if it persists, it might be a red flag.
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