AMZN: Amazon vs. Microsoft: Which Stock is a Better Buy?

The COVID-19 vaccine jointly developed by Pfizer, Inc. (PFE) and BioNTech SE (BNTX) have significantly affected tech stocks, which capitalized on the stay-at-home trend during the pandemic. As social distancing restrictions are expected to be relaxed following the vaccination of the population, the stay-at-home trend may not continue for long. This has caused some of the most traded stocks over the past couple of months to tumble. E-commerce giant Amazon.com, Inc. (AMZN) lost 3.6% since the vaccine announcement on Monday, while Microsoft Corporation (MSFT) declined 3.5%.

Despite the temporary bearishness regarding the technology industry, companies such as AMZN and MSFT are expected to revive soon because of some permanent measures triggered by the pandemic. Global workplace analytics estimates 25-30% of the workforce to work from home for a couple of days in a week by the end of 2021, based on its global work-from-home experience survey. The permanent change in consumer behavior should help the e-commerce market grow as well.

Hence, AMZN and MSFT are expected to maintain their market dominance post pandemic, given the fundamental strength of their businesses. AMZN’s aggressive pricing strategy and business diversity has allowed it to emerge as an industry leader even before the pandemic, while MSFT captured significant market share through its innovative and user-friendly software services. Investing in these stocks during a dip should help investors warrant higher capital gains when the market stabilizes.

Both stocks have generated significant returns over the past five years. AMZN gained 360.1% over this period, while MSFT returned 294.3%. In terms of year-to-date performance, AMZN is the clear winner with 64.3% gains versus MSFT’s 33.8% returns.

But which stock is a better buy now? Let’s find out.

Latest Movements

AMZN recently opened fulfilment centers in Missouri, North Dakota, Nebraska, Texas and Kansas, consolidating its supply chain in the United States. This move is expected to improve AMZN’s reach to the remote parts of the country, accounting for higher demand and thereby revenues.

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 from 2022.

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On October 29^th, AWS announced general availability of Nitro Enclaves, 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.

AMZN’s hefty discounts and affordable pricing regime paved the way for $3.50 billion sales globally during the Amazon Prime Day sale, up 60% year-over-year.

MSFT on the other hand, benefitted from higher demand for its proprietary software during the work-and-learn from home norm. 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 26^th, 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 22^nd.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 (GME) 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.

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 5^th, 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 9.4% 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 18.2% 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.

Thus, AMZN has an edge over MSFT here.

Profitability

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.

Valuation

In terms of forward non-GAAP P/E, AMZN is currently trading at 88.20x, 181.8% more expensive than MSFT, which is currently trading at 31.30x. However, MSFT is more expensive than AMZN in terms of trailing 12-month PEG (2.01x versus 1.72x) and price/ sales (10.89x versus 4.35x).

POWR Ratings

Both MSFT and AMZN are rated a “Buy” in our proprietary POWR Ratings system. Here’s how the four components of the POWR Ratings are graded for each of these stocks:

AMZN has an “A” for Industry Rank, and a “B” for Trade Grade, Buy & Hold Grade, and Peer Grade. It is currently ranked #4 out of 58 stocks in the Internet industry.

MSFT has a “B” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is currently ranked #8 out of 96 stocks in the Software – Application industry.

The Winner

While AMZN has higher growth potential according to analysts, it is currently on the brunt of receiving one of the biggest antitrust lawsuits from the Department of Justice of the United States. The European Union also launched a similar investigation against AMZN, alleging that the trillion-dollar company misappropriated third party seller information. On the international front, AMZN is engaged into a custodial battle with Reliance Industries over access to the Indian e-commerce space, one of the fastest growing markets in the world. All of these factors combined, raise some concerns about AMZN’s future performance.

On the contrary, MSFT is laying the groundwork to become the leading cloud computing service provider globally, through strategic multi-year alliances with companies operating in different spheres. This, coupled with its impressive financial results and growth potential makes it a better buy here.

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AMZN shares were trading at $3,120.87 per share on Wednesday afternoon, up $85.85 (+2.83%). Year-to-date, AMZN has gained 68.89%, versus a 12.18% 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...