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Cloud computing businesses are spending a ton now, but will reap the rewards later. The article provides stock picks in the AI realm, focusing on companies deeply invested in cloud computing infrastructure, highlighting them as excellent long-term winners for investors looking to deploy $1,000.
For investors with $1,000 to invest, the article suggests several artificial intelligence (AI) stocks that are also deeply involved in cloud computing. While these companies might not always top traditional AI investment lists, their shared focus on cloud infrastructure makes them attractive. The substantial capital expenditures in cloud infrastructure, though significant now, are expected to generate rewards over decades, positioning companies like Amazon, Alphabet, and Microsoft as strong long-term investment opportunities.
Amazon, though primarily known for its commerce business (79% of Q1 sales), holds significant AI investment potential through its highly profitable cloud computing segment, Amazon Web Services (AWS). AWS contributed 59% of Amazon's operating profits, making it a key driver for investor interest. Amazon is making massive investments, allocating $200 billion to capital expenditures this year, primarily for expanding data centers to meet the high demand from AWS users. This substantial investment is anticipated to significantly boost Amazon's free cash flow over the long term, making it an excellent investment due to the faster growth of its most profitable business unit.
Alphabet's investment thesis in AI closely mirrors Amazon's, with its Google Cloud unit being a central focus. Google Cloud distinguishes itself through its Tensor Processing Units (TPUs), custom-designed chips developed in partnership with Broadcom. Alphabet's superior TPU production capacity allows it to sell these advanced chips to external clients, driving remarkable growth in Google Cloud. In the first quarter, Google Cloud's revenue surged by an impressive 63% year-over-year, outperforming other major cloud providers. This rapid expansion in cloud computing and chip sales solidifies Alphabet as a strong AI pick, with its leading custom chip technology and established footprint promising impressive returns in the coming years.
Microsoft is considered a strong third option among top cloud companies for AI investment, despite its Azure cloud platform's 40% revenue growth in the past quarter not accelerating as rapidly as Amazon's or Alphabet's. While this is a minor drawback, 40% growth for a business unit the size of Azure remains substantial. A significant advantage for Microsoft is its relatively cheaper valuation compared to its peers. Trading at 24 times forward earnings, Microsoft is less expensive than Alphabet (28 times) and Amazon (32 times), which is unusual given its historical pricing alignment with Amazon. This more attractive valuation, combined with solid growth prospects in Azure, makes Microsoft a compelling AI stock to consider in May.