Microsoft's Azure grew 40% last quarter while Amazon's AWS posted its fastest growth in 15 quarters, as the two hyperscalers prepare to spend nearly $400 billion combined on capital expenditures this year — much of it on AI data centers.
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Microsoft and Amazon battle for AI cloud dominance at $400B in CapEx
Microsoft's Azure grew 40% last quarter while Amazon's AWS posted its fastest growth in 15 quarters, as the two hyperscalers prepare to spend nearly $400 billion combined on capital expenditures this year — much of it on AI data centers.
Microsoft's Azure and other cloud services revenue rose 40 percent year over year in the fiscal third quarter ended March 31, edging up from 39 percent the prior quarter and keeping the software giant ahead of AWS on growth. Total Microsoft cloud revenue reached $54.5 billion, up 29 percent, while the company's AI business passed a $37 billion annual run rate, up 123 percent. Commercial remaining performance obligations — revenue under contract but not yet delivered — climbed 99 percent year over year to $627 billion.
"Azure growth should show modest acceleration in the second half of the calendar year compared with the first half," Amy Hood, Microsoft's chief financial officer, said on the company's earnings call.
Amazon's cloud unit is closing the gap. AWS revenue rose 28 percent year over year in the first quarter of 2026, the fastest growth in 15 quarters and an acceleration from 24 percent in the fourth quarter of 2025 and 20 percent in the third. AWS generated $14.2 billion in operating income in Q1, close to 60 percent of total operating profit on about a fifth of revenue, at a margin near 38 percent. Its signed-contract backlog reached $364 billion, before including a recent Anthropic deal worth more than $100 billion.
"It is very unusual for a business to grow this fast on a base this large, and the last time we saw growth at this clip, AWS was roughly half the size," Amazon Chief Executive Officer Andy Jassy said on the company's first-quarter earnings call.
The CapEx question hangs over both stocks
Microsoft expects to spend about $190 billion on capital expenditures this year, up 61 percent, while Amazon plans roughly $200 billion. The combined $390 billion outlay has narrowed gross margins at both companies as data-center depreciation mounts. Amazon's free cash flow has dropped to about $1 billion over the past year from nearly $26 billion, while Microsoft's operating margin still expanded to 46.3 percent from 45.7 percent a year earlier.
The spending has weighed on share prices. Microsoft stock has fallen about 19 percent year to date, making it one of the biggest laggards among megacap tech stocks. Amazon has fared better but still trails the broader market. Microsoft trades at about 23 times earnings, while Amazon commands a multiple near 29 times.
Azure's edge vs AWS's breadth
Microsoft's advantage extends beyond cloud infrastructure. Its overall cloud business includes Office 365, Dynamics 365, and LinkedIn, giving it a broader software ecosystem that generates high-margin recurring revenue. The company returned $10.2 billion through dividends and buybacks in its fiscal third quarter alone.
Amazon counters with a retail business that grew North America sales 12 percent in Q1 and an advertising arm that has topped $70 billion over the trailing 12 months. AWS's custom AI chip business is growing at a triple-digit pace, and its partnership with Anthropic gives it access to models that some benchmarks show outperforming OpenAI's offerings.
Microsoft's deal with OpenAI changed in April, leaving its access to the startup's technology no longer exclusive. The software giant is working on its own AI models, expected by 2027, which could reduce the cost of running AI inside its products and help protect margins.
What it means for investors
Both companies face the same fundamental question: whether the hundreds of billions spent on AI infrastructure will generate adequate returns. Microsoft's Azure is growing faster, its margins are wider, and its stock is cheaper on a P/E basis — yet its OpenAI relationship has weakened and its CapEx burden is rising. AWS is reaccelerating, its cloud margins are strong, and its retail and advertising businesses provide diversification that Microsoft lacks. If AWS keeps closing the growth gap with Azure while Microsoft's margins slip, the investment case could flip quickly.
This article is for informational purposes only and does not constitute investment advice.
