Why Investor Preference For Microsoft Over Amazon Looks Misguided

by Trefis Team
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Microsoft’s stock (NASDAQ:MSFT) has doubled since the beginning of 2018. Great news for Microsoft investors. Things haven’t been too shabby for Amazon (NASDAQ:AMZN) investors either, as the company’s stock also gained almost 60% during the same period. But it is hard to believe why Microsoft’s stock is up more Amazon’s stock – especially since Amazon’s revenue growth for the 2017-2019 period stood at 58% – double the 30% growth rate for Microsoft. Our dashboard Amazon vs. Microsoft: Does the price movement makes sense, has the underlying numbers behind our belief that Amazon is likely a strong investment right now.

No doubt, the key parameter investors were looking at was the margin. Microsoft’s profit margins (net income as a percentage of sales) are higher at 31% versus 4% for Amazon. But Microsoft’s margins have risen by 18% between 2017 and 2019, while Amazon’s margin has multiplied nearly 2.5x in the same period. We believe Amazon’s margin will continue to witness strong growth – a view that is reinforced by the fact that Microsoft’s P/E is lower at 36x (based on its current market price and FY’19 EPS), while Amazon’s is 104.3x.

How Do The Core Businesses For Amazon And Microsoft Compare?

Let’s look at the core business prospects a bit more closely. Amazon is a massive online retailer and has actually seen a sizable jump in consumer spending, especially for essentials due to the pandemic. This has helped the business as Amazon’s Revenues are expected to have a growth of 18% for 2020. While Microsoft also looks immune with its focus on productivity and cloud software along with Windows and the Office Suite (Word, Excel, and PowerPoint) applications that are internet “utilities,” Amazon’s AWS business isn’t far behind. In fact, it has a formidable and growing presence across the cloud computing segment along with storage, database, and other service offerings. But Amazon’s strength is the significant diversification in its business model. On its retail platform, it sells everything from basic essentials like groceries to high-end products, competes in the IT services market with its AWS segment, creates content with its Primevideo platform, and also has a significant presence in the traditional brick-and-mortar retail store.

To conclude, we believe Amazon is likely to outperform Microsoft – if not near-term, at least in the medium- to long-run. There may be an even bigger opportunity when you compare Google to Apple.

 

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