The market is worried about one thing right now: artificial intelligence (AI) spending. This is understandable; Many AI hyperscalers are throwing boatloads of money at this technology, and there hasn’t really been a return on investment. The market will instead turn to proven techniques or strategies that can provide a return on some of that money’s capital. I think AI will provide that, but investors will have to be patient.
The market is generally not a sick institution. For the most part, each stock is judged on what it’s doing in the next quarter or year, not where it’s going in five years. This mistake is an ideal investor opportunity, as this AI spending starts to make sense when viewed over a 50-year time frame. With that in mind, I think from the capital expenditure estimates Amazon (NASDAQ: AMZN ), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL )and Microsoft (NASDAQ: MSFT ) It is reasonable, there is an opportunity.
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The biggest motivator for these three is their cloud computing business. At its core, cloud computing is really a rental platform. Big tech companies like these three build excess computing capacity, then lease it to customers who don’t have the capacity they need. Although it is not as cost-effective for customers to build their own data center, it is also a much cheaper upfront cost. It doesn’t make sense for an AI start-up to build its own data centers out of the gate, because the technology can flop, and all the money spent on hardware upfront can allow the company to operate longer than if it had just leased off-the-shelf power.
You’re starting to see this now with OpenAI, as it used to work exclusively on Microsoft Azure, but later expanded to build its own data centers. Many AI clients can run their workloads on cloud computing servers forever, so the upfront investment from Microsoft, Amazon and Alphabet makes sense.
Ultimately, this trio will build all the computing capabilities they need. Once this happens, they will no longer have the expense of building a data center, only normal maintenance and replacement of burn-out or old computing hardware. At that point, the cloud computing wings of these three will turn into absolute cash cows, making them brilliant stocks to invest in right now.
Currently, each of them is doing well, but they could become even stronger over the next five years as AI spending ramps up.
Starting with the largest, Amazon Web Services (AWS) is also the slowest growing. AWS grew at a 24% year-over-year pace in the fourth quarter — the best in three years. It is seeing particular strength from its in-house design chips, which saw triple-digit revenue growth in Q4. If AWS can sustain that growth rate into 2026, Amazon will benefit massively overall.
Growing the fastest, Google Cloud posted 48% growth in Q4. An interesting point – Google Cloud added $5.71 billion in revenue over the year. AWS added $6.79 billion in new business. So, just because Google Cloud is growing fast, it doesn’t mean it’s actually getting bigger than AWS. Still, it’s an exciting part of Alphabet’s business, and it could grow rapidly, given that Alphabet has one of the top-producing AI models in Gemini.
The last is Microsoft Azure. Microsoft does not provide single-segment results, only growth rates. So, unlike AWS or Google Cloud it’s impossible to know how big or profitable Azure is. Still, Azure grew 39% year over year – an impressive figure. Azure is one of the top reasons to own Microsoft stock, and I don’t think that will change anytime soon with a massive $625 billion backlog for its services.
There is a huge demand for AI computing power, and these three cloud computing providers are the primary way AI companies get it. I think their move to spend billions of dollars on capital expenditures is the right thing to do, even if the market isn’t a big fan of it in the short term.
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Keithen Drury has positions at Alphabet, Amazon and Microsoft. The Motley Fool has positions on and recommends Alphabet, Amazon, and Microsoft. Motley Fool has a disclosure policy.
Here’s Why Amazon, Alphabet, and Microsoft’s AI Spending Is a Genius Move was originally published by The Motley Fool.
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