Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) are making massive investments in data centers, with both companies planning to spend over $420 billion combined by 2026. Amazon aims to invest $220 billion, while Alphabet expects to spend $200 billion, primarily to expand their cloud computing infrastructure.
Amazon's cloud division, Amazon Web Services (AWS), is a major driver of its profitability. In Q2, AWS generated 60% of Amazon's operating profits, despite contributing only 21% of its total revenue. The company's operating income grew by 43% year over year, fueled by AWS's higher margins and rapid growth. Alphabet's Google Cloud is also expanding quickly, with an 82% year-over-year revenue growth in Q2, but it has less impact on the company's overall profits compared to AWS.
While AWS leads the market with a 28% share, Google Cloud is growing at a faster rate and holds 15% of the market. Despite this, both companies are trading at similar valuation metrics, making it difficult to choose between them based solely on valuation. Investors must decide whether they prefer Amazon's outsize profit growth or Google Cloud's rapid revenue expansion.
The article concludes that both Amazon and Alphabet are strong investments, with significant growth potential in their cloud segments. However, the author leans toward Amazon due to the outsized impact of AWS on the company's profitability.