The pair are now the two most valuable companies in the world, with Amazon having recently overtaken Microsoft for the top slot. But market values now at roughly $800 billion apiece mean that investors have placed rather large bets on both.
Amazon shares have popped nearly 29% over the last year while Microsoft has gained about 17%. That is well ahead of most of their Big Tech peers. Apple Inc., valued at more than $1 trillion less than three months ago, is down 13% over the last 12 months.
High values come with high hopes for the coming fourth-quarter earnings season as well as for the full year. Many large tech companies, including Apple, Facebook and Google-parent Alphabet Inc., are watching costs rise faster than revenues, pressuring their bottom lines.
Reflecting this, 58% of the tech companies on the S&P 500 that are slated to report results for the December-ending quarter are expected to show earnings growth lagging revenue growth for the period, according to an analysis of data from S&P Capital IQ.
Amazon and Microsoft, however, are expected to show the opposite. Amazon is seen reporting a 74% surge year over year in operating earnings for the fourth quarter compared with a 19% gain in revenue for the period. Microsoft’s operating income is estimated to have risen 18% relative to a 13% increase in revenue for the same period. Wall Street currently projects a similar pattern for the March quarter.
The two very different companies, whose businesses have been diverging of late, have a common growth engine. Amazon and Microsoft are currently the two largest providers of public cloud services that corporate customers use to offload their computing and software needs.
That business is generating nearly $50 billion a year in revenue now between the two and is expected to double by the end of 2020. The cloud business bolsters the margins of both companies; 60% of Amazon’s trailing 12-month operating earnings came from its AWS cloud segment, which accounted for only 11% of the company’s revenue in that time.
Keeping up that momentum will be key to both companies maintaining their towering market values. That shouldn’t prove a problem for now. Demand for corporate cloud services is expected to remain strong this year; a survey by Goldman Sachs last month found chief information officers intending to move more computing tasks this year to public cloud services like Amazon’s AWS and Microsoft’s Azure.
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That despite an expected downtick in overall corporate technology spending for the year. A growing cloud is still a pretty safe bet for investors—even if that bet totals $1.6 trillion.