$AMZN & $MSFT - Cloud Duopoly

Macro Perspectives: Wed 3 Feb 2021

Amazon reported after the bell - they crushed estimates, with record quarterly earnings and record quarterly revenue.

If we annualise the numbers from Q4, it would bring the P/E down to 59 (from 98), and the $1.7 trillion market value would value the company at 3.4 times sales. Not surprisingly, it sounds expensive.

Now, Amazon has a duopoly in cloud computing, with Microsoft. With that dominance in the highly profitable cloud business, as you can see in the chart below, the trajectory of the stocks look nearly identical.

How does the AMZN valuation stack up to the valuation on MSFT?

If we annualise the most recent quarter numbers on Microsoft, we get a stock that trades at, a far cheaper, 29 times earnings but trades 11 times the annual run rate on revenue.

As we know, Amazon has a very diverse business, and the cloud has historically funded losses in its more disruptive businesses (like retail).

But if we step back and just look at earnings, Microsoft produces more than twice as much net income as Amazon. If you had to pick one to buy and one to sell (short), it's always been a bad bet to bet against Amazon. With Jeff Bezos stepping down as CEO, and moving to the Executive Chairman role, maybe that makes the decision easier - to favor Microsoft.