Key Points
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Microsoft can leverage an extensive amount of enterprise data to improve its AI tools and grow revenue.
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Amazon benefits from multiple growing revenue streams across cloud computing, advertising, and e-commerce.
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Similar to Amazon, Google is leveraging its investments in AI cloud infrastructure across a large user base.
- 10 stocks we like better than Microsoft ›
Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) still have the two ingredients that can deliver solid returns for long-term investors: AI leadership and massive consumer reach. This provides them with multiple ways to grow revenue and compound earnings.
The S&P 500 has historically averaged about 10% annual earnings growth, according to FactSet. Here’s why these “Magnificent Seven” companies can grow earnings faster than that, potentially leading to market-beating returns for shareholders.
Microsoft
Shares of Microsoft have fallen 23% year to date as investors debate what agentic AI means for the future of enterprise software. Some investors fear that Microsoft’s enterprise software could be replaced by enterprises creating their own software tools with agentic AI, but this perspective might overlook one important advantage for Microsoft.
Microsoft’s latest quarterly numbers show strengthening demand across its core services. Microsoft Cloud revenue, which includes Office subscriptions and enterprise cloud services, jumped 29% to nearly $55 billion. These numbers still show Microsoft positioned as the default productivity software provider for millions of people and businesses.
A key advantage for Microsoft is its deep enterprise relationships. Microsoft Copilot is grounded in a rich data pool from Work IQ, which has over 17 exabytes of data and is growing 35% year over year. This data spans billions of emails, chats, Team meetings, and documents. This means Copilot provides better answers as adoption grows. After another quarter of strong growth, Microsoft 365 Copilot now has over 20 million paid seats (or licensed users).
That explains why analysts still project long-term earnings growth of roughly 15% annually. With the stock trading around a conservative 22 times forward earnings, Microsoft has a reasonable path to at least double over the next five years and potentially outperform the broader market.
Amazon
Amazon is the cloud computing leader, and Amazon Web Services (AWS) continues to benefit from the AI spending cycle. AWS revenue surged 28% year over year in the first quarter, the fastest pace in 15 quarters.
What makes Amazon unique is its multiple revenue engines, including cloud business, advertising, and a massive e-commerce and shipping network. It can use shopping data to power its $70 billion in trailing-12-month advertising revenue, and use AI capabilities from its investments in data centers and chips to build shopping assistants like Rufus. It all synergizes together into a durable competitive moat.
Importantly, more of Amazon’s business has shifted to high-margin services in recent years. Cloud consumption revenue, third-party fulfillment fees, advertising services, and subscriptions give Amazon several profitable growth engines that can expand earnings even if retail sales growth moderates.
For these reasons, analysts still expect Amazon’s earnings to grow at an annualized rate of about 21% over the next several years. That high growth, combined with a reasonable forward earnings multiple of 27, could drive market-beating returns.
Alphabet (Google)
Billions of users across Search, YouTube, and other services fuel Alphabet’s advertising and subscription revenue. However, its fast-growing cloud computing segment is showing why this is one of the best AI stocks to buy for the long term.
The company’s revenue surged 22% year over year in the first quarter, reaching nearly $110 billion. Google Cloud is still a smaller contributor relative to Alphabet’s total, but it’s scaling quickly, with segment revenue up 63% year over year. This reflects trends similar to those in AWS, with enterprises scrambling to use AI tools to build custom applications and analyze their data more intelligently in the cloud.
Investments in training its Gemini AI model have led to more capable enterprise tools and consumer services, such as AI features built into Google Search. More helpful services pave the way for higher revenue potential.
Alphabet recently announced an $80 billion equity offering to fund its AI compute build-out, including a $10 billion investment from Warren Buffett’s Berkshire Hathaway. This is a meaningful signal of the long-term growth opportunity as a leading AI distributor for consumers and enterprises.
The stock is trading at a reasonable forward earnings multiple of 25, with analysts projecting 15% annualized earnings growth in the coming years. This is roughly in line with Microsoft and Amazon, setting up excellent prospects for outperformance relative to the broader market.
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John Ballard has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Berkshire Hathaway, and Microsoft. The Motley Fool has a disclosure policy.
