Big tech stocks Facebook, Inc.(FB), Amazon.com, Inc. (AMZN), Apple, Inc. (AAPL), Microsoft (MSFT), and Alphabet, Inc. (GOOGL) have long remained investor favorites, giving rise to the popular acronym, FAAMG. The original acronym was FANG, which included Netflix (NFLX), and not AAPL and MSFT. Then NFLX was added to make it FAANG. Goldman Sachs coined FAANG, which included the top performing tech stocks. NFLX was not included in the new acronym as it is not as big as the other companies.
The past year has been big for both AMZN and MSFT, as the pandemic triggered a massive rally. At a time when the global economy is at a standstill, these stocks have routinely generated double digit gains. However, the news of an effective vaccine led to a tech sell-off, sending these stocks a little lower.
Irrespective of the temporary setback, both AMZN and MSFT should rebound pretty quickly, given the rising cases of coronavirus all around the world. Also, these companies are established industry leaders with a sizable market share, developing products which are the backbone of technological innovation and modern lifestyle, thereby are well-positioned for significant growth in the upcoming months.
Both companies have generated decent returns over the past five years. While AMZN gained 363.7% over this period, MSFT returned 287.7%. In terms of year-to-date performance, AMZN is the clear winner with a 67.7% gain versus MSFT’s 33.2% return.
But which stock is a better buy now? Let’s find out.
AMZN recently opened fulfilment centers in Missouri, Mississippi, North Dakota, Nebraska, Texas, and Kansas, consolidating its supply chain in the United States. This move is expected to improve AMZN’s reach to remote parts of the country, accounting for higher demand and thereby revenues.
AMZN announced Black Friday Deals from November 20th to 26th, levying aggressive discounts on most of its items. Ahead of the holiday season, this week-long sale is expected to generate significant revenues for the e-commerce giant. AMZN was named a low-priced leader by Profitero, as the company has the best prices across 21 essential product categories.
AMZN recently launched Amazon Pharmacy for online prescription medication sales. The online drug sales through the e-commerce platform reaps several savings benefits, with up to 80% savings on no-prescription medication.
In light of rising demand for cloud services, AMZN announced construction of a second infrastructure region in India, catering to the Asia Pacific region. Estimated to be operational by 2022, this should boost Amazon Web Services (AWS) operations across the Asian subcontinent, as cloud services are gaining traction under the remote working culture. Construction of a data center for AWS is underway in Switzerland as well, which is expected to operate in the European areas in 2022.
AMZN also launched AWS Glue DataBrew, which facilitates visual data preparation without writing code. Simplifying data storage and processing, AWS Glue DataBrew is likely to attract a vast majority of clients due to its user-friendly nature.
On October 29th, AWS announced the general availability of Nitro Enclaves and Network Firewall, allowing users to securely process highly sensitive data. Its high encryption and security measures are likely to appeal to a wider demographic, thereby boosting AMZN’s revenues from its cloud computing segment.
MSFT on the other hand, benefitted from higher demand for its proprietary software during the new work-and-learn from home normal. It also took several steps to boost its cloud computing services Azure, which has emerged as one of the major cloud platforms adopted across various organizations to facilitate the remote working culture.
On October 26th, MSFT partnered with Adobe, Inc. (ADBE) and C3.ai to launch an AI-first customer first relationship management solution C3 AI CRM powered by Microsoft 365, and integrated with Adobe experience cloud.
MSFT entered into a strategic agreement with Honeywell Space on October 22nd. According to the agreement, Honeywell would use Microsoft Azure and Dynamics 365 Field Service to build domain specific applications for workflow management and improved efficiency.
MSFT also has a standing agreement with Bentley to collaborate on smart city urban planning and construction, using MSFT Azure IoT Digital Twins and Azure Maps.
MSFT’s wide strategic alliances venture out to the digital video gaming industry as well. Earlier in October, the company partnered with GameStop Corp to facilitate new games using Dynamics 365 to be Microsoft Xbox compatible. MSFT also acquired ZeniMax Media and game publisher Bethesda Softworks in this regard.
On November 12th, MSFT partnered with Bango to nurture Xbox subscription and console sales.
With the changing face of healthcare across the globe, MSFT entered into a multi-year strategic partnership with ZEISS to imbibe a data driven cloud platform in the healthcare industry to improve efficiency and productivity.
On October 5th, MSFT announced a five-year partnership with Rockwell Automation to develop cloud automated integrated market ready solutions for industrial transformation. MSFT also paired with AT&T (T) to streamline IoT cloud connectivity for machines and equipment worldwide.
Recent Financial Results
AMZN’s net sales increased 37% year-over-year to $96.10 billion in the third quarter that ended September 2020. Net income grew 200% from the year-ago value to $6.30 billion, while EPS rose 192.4% from the same period last year to $12.37.
MSFT’s net sales increased 12% year-over-year to $37.30 billion in the fiscal second quarter that ended September 2020. This can be attributed to 40% growth in Azure revenue, a 38% rise in Dynamics 365 revenue, and a 21% increase in Office 365 commercial revenue. Net income rose 30% from the year-ago value to $13.90 billion, while EPS grew 32% from the same period last year to $1.82.
Past and Expected Financial Performance
AMZN’s revenue and net income increased at a CAGR of 29.3% and 108.2%, respectively, over the past three years. MSFT’s revenue and net income, on the other hand, rose at a CAGR of 14% and 21.6%, respectively, over the same period. AMZN’s EPS grew at a CAGR of 105.8% over the past 3 years, while MSFT’s EPS rose at a CAGR of 22.5% over the same period.
Analysts expect AMZN’s EPS to increase 9.6% in the current quarter, 51.5% in the current year, 30.1% next year, and at a rate of 36.4% per annum over the next five years. Consensus revenue estimates indicate 36.6% growth in the current quarter, 35.4% in the current year, and 18.3% next year.
MSFT’s EPS is expected to increase by 8.6% in the current quarter, 17.5% in the current year, 10.2% next year, and at a rate of 14.5% per annum over the next five years. Analysts estimate revenues to increase 8.9% in the current year, 10.7% in the current year, and 11.1% next year.
While MSFT beat the consensus EPS estimates in each of the trailing four quarters, AMZN missed in one.
AMZN’s trailing 12-month revenue is 2.37 times what MSFT generates. However, MSFT is more profitable with a gross margin of 68.3% compared to AMZN’s 40.2%.
MSFT’s ROE and ROA of 41.4% and 12.1% compare favorably with AMZN’s 25% and 5.2%, respectively.
In terms of forward P/E, AMZN is currently trading at 89.33x, 565.1% more expensive than MSFT, which is currently trading at 31.17x. AMZN is also more expensive than AMZN in terms of trailing 12-month PEG (3.52x versus 2x) and Price/Cash Flow (28.13x versus 24.03x)
However, MSFT’s trailing 12-month Price/Sales of 10.86x is 18.1% more expensive than AMZN’s 8.89x.
MSFT is rated a “Buy” in our proprietary POWR Ratings system, while AMZN is rated “Neutral”. Here’s how the four components of the POWR Ratings are graded for each of these stocks:
AMZN has an “A’ for industry Rank, a “B” for Buy & Hold Grade, and a “C” for Trade Grade and Peer Grade. It is currently ranked #5 out of 58 stocks in the Internet industry.
MSFT has an “A” for Trade Grade, and a “B” for Buy & Hold Grade, Peer Grade and Industry Rank. It is currently ranked #13 out of 96 stocks in the Software – Application industry.
Despite being the biggest e-commerce company in the world, the current market conditions have imposed a barrier on AMZN’s growth opportunities. Vaccine news shifting investor sentiment to outdoor stocks have led to an e-commerce and stay-at-home stock sell-off, as reflected in AMZN’s 3.6% decline over the past month. This, combined with the antitrust charges brought forward by the United States government and European Union pose a threat to AMZN’s global market dominance.
MSFT is in a relatively better position, as the tech boom is likely to stay for a long period. While the cloud computing services rose to popularity during the pandemic, the advantages of this cloud set up is here to stay, even when the pandemic is over. So, MSFT is the better pick here.
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AMZN shares were trading at $3,114.79 per share on Tuesday morning, up $16.40 (+0.53%). Year-to-date, AMZN has gained 68.56%, versus a 14.03% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More…
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