Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) are making massive investments in data centers, with plans to spend a combined $420 billion by 2026. Nearly all of this expenditure will go toward expanding their cloud computing infrastructure, driven by surging demand that outpaces current capacity.
Amazon Web Services (AWS) is a critical component of Amazon's business, contributing 21% of its total revenue but an impressive 60% of its operating profits. In Q2, AWS revenue grew 20% year over year, while operating income surged 43%. This stark contrast highlights how AWS's high margins amplify Amazon's overall profitability.
Alphabet, meanwhile, is also investing heavily in Google Cloud, which saw an 82% year-over-year revenue growth in Q2. Despite this rapid expansion, Google Cloud remains smaller than AWS, with a 15% market share compared to AWS's 28%. While Google Cloud's operating margin is slightly higher than Alphabet's overall margin, its impact on the company's bottom line is less pronounced than AWS's effect on Amazon.
Both Amazon and Alphabet trade at similar valuations based on operating P/E ratios, making the choice between them a matter of preference. Investors must decide whether they prioritize AWS's outsize profit growth or Google Cloud's rapid revenue expansion.