The horse race between Amazon and Microsoft’s cloud computing businesses has gone through various phases over its nearly two-decade history, with the current AI boom pushing the rivalry to a new, and perhaps unsustainable, level of intensity.
Each company is set to spend roughly $200 billion this year building out its data centers—an unprecedented level of investment—in a frenzied bid to keep up with demand for AI services and to avoid getting overtaken by other cloud rivals like Google. The cloud titans have also forged partnerships and deals with the big AI model makers, creating a web of shifting alliances that each hopes could reshape the competitive landscape.
This week, investors will get an important update on the state of this epic cloud rivalry, when Microsoft reports its quarterly earnings on Wednesday and Amazon follows suit on Thursday. While Amazon and Microsoft have been locked in the cloud battle for years, the pressure has never been higher and investor patience has never been more unpredictable. Revenue growth, profit margins, and customer backlogs at Amazon Web Services and Microsoft Azure will be closely scrutinized. But the costs of the race will also be destiny determinants, as investors question the massive sums of capital being deployed and the timeline for seeing a return on the investment.
Last Thursday, Google parent Alphabet’s stock cratered 7% after the company raised its capital-expenditure projections for the year and reported negative free cash flow in its second quarter. For Amazon and Microsoft, the two cloud computing leaders, getting an edge could hinge on who can convince investors that they can soak up all that investment and spin it into gold faster.
Luke Rahbari, CEO of Equity Armor Investments who holds both stocks across several portfolios, said that even the act of raising and allocating capital has become a competitive bloodsport.
“Whoever controls the money controls the winners,” said Rahbari. “You’ve got to soak up as much money as you can so there isn’t as much money available to other players.”
Rahbari said he’ll be listening this week for signs of shakiness, and cracks in the voices of Microsoft CEO Satya Nadella and Amazon’s Andy Jassy, like the kind Rahbari made “when I had to call my parents from boarding school and tell them what kind of trouble I got into.”
“Frenemies”
Most investors are all in on both sides of the horse race. Amazon and Microsoft are two of the five largest weights in the S&P 500 with 8% to 9% of the index between them, so anyone investing for retirement has skin in the game. But the crux for any investor is that the massive spending must start flowing back to these companies as massive returns within the next few years. According to data from S&P Capital IQ, Microsoft’s stock trades at about 23 times expected earnings, cheaper than Amazon’s 27 times. Year-to-date, Microsoft’s stock is down 19%, while Amazon has been generally flat to up 2.5%.
Melissa Otto, global head of Visible Alpha research at S&P Global, described Amazon and Microsoft as competitors in a sense, but said she thinks of them more like “frenemies.” The hyperscaler market between Amazon Web Services, the name of Amazon’s cloud business, and Microsoft’s Azure cloud business operates largely with each holding a distinct slice. In her view, AWS is the flexible, customizable platform that is ideal for startups and for enormous machine learning workloads. It’s also more difficult to learn, she said. Azure extends the Microsoft software that enterprises already run, which makes it easier to adopt, she said.
In sum, the two have different strengths and chase different clients. When they do go after the same cohort of companies, customers often wind up buying both, she said.
The data, however, shows why it’s still essentially a horse race.
Between them, Microsoft and Amazon own half the cloud market, with Amazon’s 28% market share topping Microsoft’s 21%, according to Synergy data. Google Cloud, occupies the third spot, with its share of the market fluctuating between 12% and 14% depending on the quarter.
Based on Visible Alpha consensus estimates, AWS could reach $168 billion in net sales in 2026, up from last year’s $128.7 billion, a 30.7% rise. The margins AWS earns on that revenue, Otto said, “are sensational” at 93.8% gross margin, with a 35.4% operating margin expected. AWS has a current backlog of remaining performance obligations—signed customer contracts that will bring future revenue—of $364 billion, which excludes a recent $100 billion deal with Anthropic, Bank of America analysts wrote in a recent note, and said its in-house chip revenue commitments exceed $225 billion.
Microsoft’s Azure and its other cloud services are expected to reach $148.9 billion in the company’s fiscal 2027, up about 40% from roughly $106 billion in fiscal 2026, which ended in June. Still, Microsoft’s pace puts them slightly ahead of AWS, although it’s on a somewhat lower base, said Otto.
Microsoft doesn’t report metrics for Azure in the same way Amazon does for AWS. Visible Alpha estimates the Intelligent Cloud business earns an operating margin of about 47%, higher than AWS’s 35%. But that figure also includes older, higher-margin server software, so the actual number might be lower. Microsoft disclosed nearly $627 billion of remaining performance obligations which is 99% higher year-over-year, BofA analysts wrote. The RPO figure includes its entire commercial business, however, including Azure, M365, and Dynamics.
“Not only is [the Intelligent Cloud business] very profitable, it’s more profitable than AWS and growing faster,” Otto said, although that edge could be because enterprises are adopting AI and spending to keep up.
Still, it’s anyone’s game.
“We’re still extremely early days, so there isn’t really an established winner,” said Otto. “That’s why it’s such an arms race, because the incumbents don’t want to lose their edge.”
Both companies are plowing cash into their businesses, buying gear and building data centers to expand their cloud and AI services. Amazon’s free cash flow dropped to $1.2 billion during the past 12 months from $25.9 billion a year ago, and it more than doubled its bond debt to more than $120 billion. Microsoft isn’t issuing new bonds and is instead funding a buildout of roughly $35 billion per quarter from its operating cash flow. Its free cash flow for the 12 months ending in March was $73 billion, which was actually up slightly year-over-year, though analysts say comparing the cash flow directly to AWS is complicated because of the different ways the two companies’ finances are structured.
The Longshot
For Microsoft, the cloud race began as a longshot, as Nadella described recently.
“I remember when I became CEO, everybody said, oh my God, isn’t it too late man? Like, why even bother to build a public cloud because Amazon is so far ahead,” Nadella recalled at a Morgan Stanley conference in March. “We knew it was going to be multiplayer. We knew that there is going to be margin, and we kept building.”
The building has now reached a scale that investors could never have predicted. Amazon has guided to about $200 billion in capital expenditures across the company in 2026. Microsoft spent $104 billion in the first nine months of its fiscal year 2026, and is expected to land near $190 billion for the calendar year, based on guidance from CFO Amy Hood in April.
Jassy has told shareholders the AWS spending is almost all spoken for, including a commitment from OpenAI of more than $100 billion.
“We’re not investing approximately $200 billion in capex in 2026 on a hunch,” he wrote in his annual letter to investors. “Of the AWS capex we expect to spend in 2026, much of which will be monetized in 2027-2028, we already have customer commitments for a substantial portion of it.”
AWS has to splash out cash on land, power, and compute about six to 24 months before it can bill customers for cloud services, he wrote.
“The more capacity we open up, we sell it immediately,” Matt Wood, AWS’s chief AI and Technology officer told Fortune.
Nadella’s conviction on the massive investment rests on software, the backbone of Microsoft. Asked in March at the Morgan Stanley conference how to think about the return on all the capital Microsoft is spending, he offered a three-pronged answer that includes diverse customers, strong utilization, and a multi-generation total cost of ownership curve.
“We have OpenAI book, we have Anthropic book, but we want to also have the long tail of enterprise IT,” Nadella said.
With both Microsoft and Amazon neck-and-neck, the two cloud businesses are are selling out of everything they can build.
According to Amazon’s Wood, the applications that will fund returns are still newborns. The handful of available breakout AI products include chat assistants and coding tools, much like the early days of the internet when there were only a few websites.
“We’re going to have millions of them, just like we have millions of websites today,” said Wood. Efficiency gets customers in the door, but “there are going to be entirely new categories of products that just didn’t exist a year ago that are going to be absolute breakthrough smash hits.”
Both companies are selling everything they can build and throwing everything they have at building as fast as they possibly can. Whether that converts into the returns investors are waiting for gets its next test this week.
