Amazon and Alphabet's $420 Billion Bet on Cloud Computing

Amazon and Alphabet are investing heavily in cloud computing, with projected capital expenditures of $420 billion over the next few years. This massive spending is driven by growing demand for their services, with Amazon's AWS experiencing a 37% year-over-year revenue growth in Q2, its best rate in nearly five years.

Alphabet's Google Cloud is also growing rapidly, with an 82% year-over-year revenue increase in Q2. The company expects to sell custom AI chips, which can deliver better performance at lower cost than traditional GPUs, and this will boost its growth rate even further.

While neither Amazon nor Alphabet is considered a cheap stock, their projected earnings growth justifies the price tag. With forward P/E ratios of 25 for Amazon and 23 for Alphabet, there's about a year's worth of growth baked into each stock's price.

The companies' strong cloud computing businesses require major investments to meet demand, but this investment pays off in the long run. In fact, if they were to pay out their entire capital expenditure as a one-time dividend, Amazon shareholders could have received $20.41 per share and Alphabet investors would have gotten $16.40 per share.