Microsoft vs. Amazon.com: Which FAAMG Stock is a Better Investment?

In terms of market capitalization and  influence on the stock market, FAAMG stocks—Facebook, Amazon, Apple, Microsoft, and Google (Alphabet)—are the leaders. But between Microsoft Corporation (MSFT) and Amazon.com, Inc. (AMZN),which one is a better buy now?

MSFT develops, supports, licenses, and sells various software products, services and solutions worldwide. The company also manufactures and sells PCs, tablets, gaming and entertainment consoles, intelligent devices, and related accessories through OEMs, distributors, resellers, digital marketplaces, and retail stores. In comparison, AMZN is the world’s largest e-commerce company that offers a wide range of products. And the company’s cloud computing platform, Amazon Web Services (AWS), is one of the biggest platforms in the digital computing space globally. It offers personalized shopping services, web-based credit card payment, and direct shipping to customers.

FAAMG stocks account for more than one-third of the S&P 500, which is widely accepted as the best representation of the U.S. economy. Keeping pace with changing consumer demand, these technology-focused companies have gained significantly over the years. The increasing dependence on tech solutions in the digital era should keep driving the performance of FAAMG stocks, and the technology sector is expected to reach $5 trillion in 2021. So, both MSFT and AMZN should benefit.

But while AMZN has declined 2.5% in price over the past three months, MSFT has surged 12.9%. In terms of the past nine months’ price performance, MSFT is a clear winner with 35.5% gains versus AMZN’s 4.9% returns. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

MSFT and EY (or Ernst & Young Global Limited), a multinational professional services network in London, expanded their strategic relationship on August 11, 2021, to further align EY business ingenuity with MSFT’s cloud technologies by launching new solutions and platforms. By further extending  EY  Microsoft Services Group’s operation, EY hopes to help clients gain access to managed services that fuel client transformation, unlock value and develop a first-of-its-kind, enterprise-scale, trusted data fabric to achieve a $15 billion growth opportunity over the next five years.

On September 22, 2021, AMZN’s Amazon Web Services (AWS) subsidiary announced plans to open an infrastructure region in Aotearoa, New Zealand, in 2024. The new AWS Asia Pacific (Auckland) Region will enable more developers, enterprises, governments, and nonprofit organizations to run their applications, securely store data, and efficiently serve end users from data centers. The ability to support customers’ business continuity and provide low latency for high availability applications that use multiple Availability Zones should  enable AMZN to generate greater demand in the future.

Recent Financial Results

MSFT’s total revenue increased 21.3% year-over-year to $46.15 billion for its fiscal fourth quarter, ended June 30, 2021. The company’s gross profit came in at $32.16 billion, up 25.2% from the prior-year period. Its operating income was  $19.10 billion, representing a 42.4% year-over-year improvement. MSFT’s net income was $16.46 billion, up 46.9% from the prior-year period. Its EPS increased 48.6% year-over-year to $2.17. As of June 30, 2021, the company had $14.22 billion in cash and cash equivalents.

For its fiscal second quarter, ended June 30, 2021, AMZN’s total net sales increased 27.2% year-over-year to $113.08 billion. The company’s operating income from operations was  $7.70 billion, indicating a 31.8% year-over-year improvement. While its net income increased 48.4% year-over-year to $7.78 billion, its EPS increased 46.8% to $15.12. The company had $40.38 billion in cash and cash equivalents as of June 30, 2021.

Past and Expected Financial Performance

MSFT’s revenue and net income have grown at CAGRs of 15.1% and 54.6%, respectively, over the past three years. The company’s EPS has increased at a 55.8% CAGR  over the past three years.

Analysts expect MSFT’s EPS to increase 13.7% year-over-year in the current quarter, ending September 30, 2021, 8.9% in the current year, and 14.7% next year. Its revenue is expected to improve 23.2% year-over-year in the current quarter, 14.1% in the current year, and 12.9% next year. The stock’s EPS is expected to grow at a 15.3% rate per annum over the next five years.

In comparison, AMZN’s revenue and net income have grown at CAGRs of 28.7% and 67.4% over the past three years, respectively. The company’s EPS has grown at a 65.7% CAGR over the past three years.

AMZN’s EPS is expected to decline 27.5% year-over-year in the current quarter, ending September 30, 2021, and rise 27.3% in the current year and 25.9% next year. Its revenue is expected to grow 16.2% year-over-year in the current quarter, 23.4% in the current year, and 18.4% next year. Analysts expect the stock’s EPS to grow at a 35.8% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward P/E, AMZN is currently trading at 64.47x, which is 89.4% higher than MSFT’s 34.04x.

In terms of forward EV/EBITDA, AMZN’s 24.19x compares with MSFT’s 23.63x.

Profitability

AMZN’s trailing-12-month revenue is almost 2.6 times what MSFT generates. However, MSFT is more profitable, with a 48.1% EBITDA margin versus AMZN’s 13.4%.

Also, MSFT’s ROE, ROA, and ROTC values of 47.1%, 13.8%, and 20.6%, respectively, compare favorably with AMZN’s 31.2%, 6% and 9.2%.

POWR Ratings

While AMZN has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, MSFT has an overall B grade, equating to Buy. The POWR Ratings are calculated considering 118 distinct factors, with each weighted to an optimal degree.

MSFT has an A grade for Sentiment, which is consistent with favorable analyst estimates. Analysts expect MSFT’s EPS to grow 13.7% year-over-year in the current quarter, ending September 30, 2021, to $2.07. However, AMZN’s C grade for Sentiment is in sync with analysts’ relatively lower estimates. Its EPS is expected to come in at $8.97 for the current quarter, ending September 30, 2021, representing a 27.5% year-over-year decline.

MSFT has a B grade for Stability, which is consistent with its lower volatility than the broader market. The company has a 0.78 beta. However, AMZN’s C grade for Stability is in sync with its slightly higher volatility. AMZN has a 1.14 beta.

Of the 76 stocks in the Internet industry, AMZN is ranked #25. On the other hand, MSFT is ranked #14 of 149 stocks in the Software - Application industry.

Beyond what we’ve stated above, our POWR Ratings system has also rated MSFT and AMZN for Growth, Value, Momentum, and Quality.

Get all AMZN ratings here. Also, click here to see the additional POWR Ratings for MSFT.

The Winner

Despite rising competition in the tech industry and increasing regulatory scrutiny, both MSFT and AMZN are well-positioned to keep growing. However, we think its lower valuation and higher profitability make MSFT a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Software - Application industry, and here for those in the Internet industry.

MSFT shares rose $0.13 (+0.04%) in after-hours trading Friday. Year-to-date, MSFT has gained 35.47%, versus a 19.89% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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