Artificial intelligence (AI) is a generational investment opportunity, but you don't have to take unnecessary risks to profit from AI. One of the best ways to profit from the growth of this technology is to invest in the leading cloud service providers.
The cloud market is valued at $297 billion, according to Synergy Research, and still growing at high rates. The cloud leaders, including Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) and Microsoft(NASDAQ: MSFT), are driving returns for their investors that are outperforming the broader market and should continue that winning streak for many years.
If you have $500 or more to invest right now, here's why you should consider buying at least one share of either these elite tech companies.
1. Alphabet (formerly Google)
Shares of Alphabet have more than doubled over the last five years, but the Google parent continues to report solid growth from its advertising and cloud businesses. The shares are up 23% year to date, outpacing the S&P 500.
Many customers are choosing Google Cloud over the No. 1 cloud service provider, Amazon Web Services (AWS). Reasons for choosing one cloud provider over another can vary, but a few factors working in Google Cloud's favor are tools that make it easy for customers to migrate data from their on-premise servers and a more modern user interface. Google Cloud's revenue grew 28% year over year in the second quarter to $10.4 billion, outpacing the broader 22% growth of the cloud market, according to Synergy Research.
Alphabet continues to ratchet up capital investment in its cloud business. The company's capital expenditures have accelerated to $44 billion over the last four quarters. Google is building more data centers and AI tools to meet surging demand in the cloud.
Moreover, Google's Vertex AI platform is winning over major organizations, including the U.S. Air Force, that need to build generative AI-powered applications. The engine behind Vertex and other AI services is Gemini, the company's AI model that powers many of the features in Google Cloud and Google's consumer products like Search.
Most importantly, Google Cloud's operating income jumped from $395 million in the year-ago quarter to more than $1.1 billion in Q2 2024. This shows Alphabet can make necessary investments in key technologies like AI while boosting margins to benefit shareholders.
Alphabet will announce third-quarter financial results on Oct. 29. Over the long term, Wall Street expects the company to report double-digit growth in earnings. With the stock trading at a reasonable forward price-to-earnings ratio of 19 on 2025 earnings estimates, Google investors should expect the stock to hit new highs in the near term and for years to come.
2. Microsoft
Microsoft stock has tripled over the last five years, with a 21% gain in 2024. Like Google, Microsoft offers software products that millions (if not billions) of people use every day, including Windows, which runs on 72% of desktop PCs, according to Statista.
But the software giant continues to experience its greatest momentum in enterprise cloud services. It is currently the No. 2 cloud service provider behind AWS, but Microsoft is quickly narrowing Amazon's lead. The Microsoft Azure cloud service grew even faster than Google Cloud in the June-ending quarter, with revenue up 29% year over year.
Microsoft is benefiting from its game-changing partnership with OpenAI, the company behind ChatGPT. OpenAI has brought significant improvements to Microsoft's software offerings, including Azure, where the Azure OpenAI service is now used by most of the Fortune 500.
Microsoft continues to plow billions into more data centers. Coincidentally, Microsoft's capital expenditures were almost identical to Alphabet's -- $44 billion -- over the last four quarters. It's doing so while also growing net income by 10% year over year last quarter to $22 billion.
Microsoft's capital investments have increased 79% since the end of 2022, compared to 40% for Alphabet. On the last earnings call, management said that the company is laying the groundwork to support growing cloud demand for the next decade and beyond. The opportunities in cloud computing and AI are clearly in the early innings.
Microsoft will announce its first-quarter financial results for fiscal 2025 on Oct. 30. But analysts expect its earnings to grow 13% on an annualized basis. Investors should be well rewarded for holding this stock over the long term.
Should you invest $1,000 in Alphabet right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
