With the ongoing artificial intelligence (AI) frenzy, Amazon (AMZN) and Microsoft (MSFT) are arguably some of the most influential and widely discussed companies on the stock market. It is no surprise that Wall Street rates both stocks as "strong buys," with the consensus expecting their stock to rally.
Let's look deeper into why these two growth stocks are the best investments for the coming decade and beyond.
Amazon
Amazon (AMZN), founded in 1994, has grown into a global e-commerce and technology powerhouse over the years. Amazon's stock has risen due to its ongoing innovation, market expansion, and strategic acquisitions.
Over the last 10 years, Amazon's stock has increased by 1,092.3%, outperforming the S&P 500 Index's ($SPX) 179% surge.
While past performance does not guarantee future results, Amazon still has a lot of juice left in the tank to thrive in the coming years, particularly in the wake of the AI era. Amazon's stock is up 30.2% year-to-date, outperforming the market as a whole.
After thriving in e-commerce, Amazon expanded into cloud computing (AWS, or Amazon Web Services), streaming services (Amazon Prime Video), and AI (Alexa).
With AI integration, AWS now leads the global cloud computing market with a 31% market share, followed by Microsoft Azure (25%) and Alphabet’s (GOOGL) Google Cloud (11%).
In the recent first quarter, AWS sales increased by 17% to $25 billion from the prior year quarter. Total sales increased by 13% to $143.3 billion, resulting in an impressive 216% increase in net earnings per share (EPS) to $0.98.
AWS is a significant revenue and profit generator for Amazon. The cloud computing market is expected to expand significantly, creating a profitable opportunity for AWS.
Amazon generates significant free cash flow (FCF), which it uses to reinvest in AI growth opportunities and acquisitions. In Q1, the FCF balance stood at $50.1 billion. Furthermore, the balance sheet showed $54 billion in cash, cash equivalents, and restricted cash.
Analysts have upwardly revised Amazon’s earnings estimates 44 times in recent months, and revenue estimates 11 times, indicating their confidence in the company's prospects.
Here's how analysts forecast Amazon's financials to turn out over the next two years:
• In 2024, revenue is expected to increase by 11.1% and earnings by 56.5%.
• In 2025, revenue is expected to increase by 11.2% and earnings by 26.3%.
Valued at 41 times forward 2024 earnings estimates, Amazon appears to be pricey. However, I believe it may be worthwhile to pay the premium, given that this is a company that has time and again demonstrated its ability to not only adapt to, but thrive in, the rapidly changing tech world.
Recently, Evercore ISI analyst Mark Mahaney reiterated his “buy” rating for AMZN stock, with a price target of $230. Mahaney believes that, despite the competition, Amazon has a competitive advantage in the e-commerce domain and will likely dominate the space.
Furthermore, a survey conducted by Mahaney showed that for 90% of U.S. online shoppers, Amazon has been the first choice over the last decade.
Overall, Wall Street is bullish, rating Amazon stock a “strong buy.” Of the 46 analysts covering AMZN, 42 rate it a “strong buy,” three recommend the stock as a “moderate buy,” and one says it is a “hold.”
The average price target stands at $221.16, which implies about 11.7% potential upside from current levels. The Street-high target price is $246, which indicates an upside of 24.3% in the next 12 months.
Microsoft
Microsoft (MSFT) dominated the tech industry with its legacy products long before the AI frenzy began. Then, the company gained an early mover advantage when it made a sizable investment in OpenAI in 2019, further extending the partnership in 2023.
Like Amazon, Microsoft's cloud computing platform, Azure - which is now powered by AI - has been a driving force in the company's recent explosive growth.
MSFT stock has gained 20.4% year-to-date, compared to about 19% for the Nasdaq Composite ($NASX).
The integration of AI into all of its flagship products has resulted in strong growth across all segments.
In Q3 of fiscal 2024, Microsoft Cloud revenue reported a jump of 23% to $35.1 billion from the year-ago quarter. Out of its three business segments, Intelligent Cloud contributed 43% of total revenue of $61.8 billion in the quarter. Meanwhile, the Productivity and Business Processes segment, which includes Office products, LinkedIn, and others, yielded a revenue increase of 11.7%. Furthermore, the More Personal Computing segment experienced some recovery during the quarter, with sales increasing by 7.4%.
While total revenue increased by 17%, adjusted earnings rose by 20% year over year.
Looking ahead, management expects Intelligent Cloud revenue to increase by 19% to 20% in Q4, while Productivity and Business Processes revenue could rise by 9% to 11%. Microsoft ended the quarter with $80 billion in cash and $42.6 billion in long-term debt. The tech titan also generated $21 billion in free cash flow, allowing it to pay out $8.4 billion in dividends and stock purchases.
Currently, MSFT stock trades at a premium, priced at 38.2x forward fiscal 2024 earnings and 13.7x forward sales. However, given the long-term growth prospects of AI, the premium might be justified.
Here's what analysts predict for Microsoft over the next two years:
• In 2024, revenue is expected to increase by 15.6% and earnings by 20.6%.
• In 2025, revenue is expected to increase by 14.4% and earnings by 12.6%.
Overall, Wall Street is bullish, rating Microsoft stock a “ strong buy.” Of the 38 analysts covering MSFT, 34 rate it a “strong buy,” three recommend the stock as a “moderate buy,” and one says it is a “hold.”
The average price target stands at $494, which implies about 9.1% potential upside from current levels. The Street-high target price is $600, which indicates an upside of 32.5% for MSFT.
The Bottom Line
Amazon’s diversified business model, strong financial health, market leadership, and continuous innovation position it well for long-term success.
Likewise, Microsoft is also poised for sustained growth, led by its legacy portfolio, brand value, robust financial position, and strategic focus on high-growth areas like cloud computing and AI.
The global cloud computing market is estimated to grow at a compound annual growth rate of 15.1% to be worth $1.3 trillion by 2028. While both are tight competitors in this field, the market has the capacity to hold both players. I believe both Amazon and Microsoft make a compelling case for the best growth stocks to buy and hold for 10 years and beyond.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
