The rise of AI in the cloud! Has the market overlooked the pressure from Microsoft Corporation (MSFT.US) and underestimated the potential of Amazon.com, Inc. (AMZN.US)?

Microsoft's market value has surpassed $4 trillion in one fell swoop, seemingly dimming Amazon's light in the AI race. However, in the AI-driven cloud competition, investors may need to shift their focus from growth rates to deeper profit structures. The AI cloud competition is not only a battle of technology and growth, but also a reshaping of profit models for tech giants. The latest analysis article from TheInformation points out that in this competition, Microsoft and Google are facing profit margin pressures from the expansion of their cloud businesses, while this presents an opportunity for Amazon to enhance its overall profitability. The market's perception of this seems to be distorted. In the latest earnings season, both Microsoft and Google reported accelerating growth in their cloud businesses. In comparison, Amazon Web Services (AWS) with a growth rate of 17% in the quarter may seem lackluster, but its business structure reveals a different story. AWS's profitability far exceeds its core e-commerce business, which means that every growth in cloud business structurally optimizes Amazon's overall profits. The cost of high growth: Microsoft and Google's "sweet troubles" For Microsoft and Google, the robust growth of their cloud businesses is a double-edged sword. According to the latest quarterly data, Microsoft's "Intelligent Cloud" division has a profit margin of 40.6%, while its "Productivity and Business Process" division, which includes business software, has a profit margin of 57.4%. The same situation occurs with Google, where the profit margin of its cloud business is 20.7%, far lower than the 40% profit margin of its "Google Services" division, which is mainly advertising. The problem lies in the fact that the cloud businesses of both companies, with lower profit margins, are growing much faster than their high-profit core businesses. Data shows that Microsoft's cloud business grew by 26% in the quarter, far exceeding the 16% growth rate of its software business; Google's cloud business grew by 32%, also far surpassing the 12% growth rate of its service division. Analysts believe that as AI further drives businesses to migrate to the cloud, this "growth imbalance" trend will become more evident. In the long run, this means that the overall profit margins of the two companies may be diluted by the continually expanding cloud business, gradually approaching the profit margin levels of their cloud business. Additionally, the potential risk of AI new products eroding Microsoft's lucrative enterprise software and Google's search advertising business is also a concern. Is Amazon's potential underestimated? Cloud business could become a profit engine Amazon's situation is completely opposite. Its AWS cloud business is the core engine of the company's profits. In the most recent quarter, AWS's operating profit margin was as high as 33%, while its massive e-commerce business had a profit margin of only 6.6%. Historical data confirms this trend. From 2017 to 2024, as AWS's share of Amazon's total revenue increases from 9.8% to 17%, the company's overall operating profit margin also leaps from 2.3% to 10.7%. The expansion of cloud business is the key driver for Amazon's profitability breakthroughs. Although the market is concerned about AWS's 17% growth rate in the quarter, there are signs that its growth may accelerate. According to New Street Research analyst Dan Salmon in a report, the backlog of AWS business (i.e., future orders promised by customers) grew significantly by 25% in the quarter, which is a strong indicator of future revenue. Of course, all cloud service providers face the same challenge: the significant capital expenditure for supporting AI will increase depreciation expenses, putting pressure on the profit margins of the cloud business itself. But the core issue lies in the long-term evolution of the business portfolio. For Google, the market seems to have already realized the profit margin risk, as its stock performance lags behind advertising industry peers like Meta. However, from the premium valuation of Microsoft's stock, investors seem to selectively overlook the same risks. For Amazon, the market may be overly focused on its current growth data, underestimating the future potential indicated by its business reserves and its unique profit growth model. This article is reprinted from Wall Street News, GMTEight Editor: Chen Wenfang.