Better Buy: Amazon.com, Inc. vs. Microsoft
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Tech giant Microsoft (NASDAQ: MSFT) is primarily known for its ubiquitous Office productivity software, Windows operating system, and Explorer internet browser, while Amazon's (NASDAQ: AMZN) claim to fame is its dominant e-commerce business. Each company has invested in other areas of significant growth, like cloud computing.
The debut of Amazon Web Services (AWS) in late 2006 ushered in an era of digital transformation that continues today. While the two companies compete head-to-head in the cloud migration that is still ongoing, when deciding to invest in one of these companies you must look beyond this one area of competition, and assess the overall health and strength of each business. Let's take a look to see which is a better buy now.
Image source: Getty Images.
Financial fortitude
While both Microsoft and Amazon are extremely successful at what they do, the proof, as they say, is in the pudding. Let's review a number of financial metrics to see how they compare.
| Metric | Amazon | Microsoft |
|---|---|---|
| Revenue (TTM) | $208.13 billion | $110.36 billion |
| EBITDA (TTM) | $21.66 billion | $49.47 billion |
| Net income (TTM) | $6.28 billion | $16.57 billion |
| Operating cash flow (TTM) | $21.86 billion | $43.88 billion |
| Free cash flow (TTM) | $8.83 billion | $32.25 billion |
| Cash and short-term investments | $27.05 billion | $133.77 billion |
| Long-term debt | $24.74 billion | $76.24 billion |
Data source: YCharts and company financial reports. TTM = Trailing 12 months.
While Amazon has produced nearly twice as much revenue over the preceding 12 months, Microsoft has a rock solid balance sheet, has moved much more of its revenue to the bottom line, and produced much greater free cash flow. It's important to note that Amazon is investing heavily in growth, but for now, Microsoft has the edge in terms of financial fortitude.
Advantage: Microsoft.
Growth
While Amazon and Microsoft have both generated impressive growth, the comparison is particularly lopsided, as Amazon's growth has accelerated in recent years.
Data by YCharts.
That dominance is expected to continue, as analysts expect Amazon's earnings per share to grow 46% annually over the coming five years, compared to just 12% for Microsoft. That isn't all that surprising, considering Amazon continues to gain e-commerce market share both domestically and around the globe, and AWS remains the dominant cloud provider.
Advantage: Amazon.
Valuation
Any better-buy scenario would be remiss if it didn't include a review of valuation. Comparing several different widely used valuation metrics will give us a sense of which company might represent a better value. Here's a look through the lens of price-to-earnings (P/E) and price-to-free-cash-flow (P/FCF) ratios.