Many software and technology stocks have faced significant declines in early 2026 as investors reevaluate the substantial capital expenditures associated with artificial intelligence (AI) infrastructure. Notably, shares of Microsoft (MSFT) have dropped approximately 17% year to date, while Amazon (AMZN) has seen a decline of over 9% during the same timeframe. Despite these setbacks, both companies reported impressive quarterly growth, suggesting that AI is acting as a tailwind rather than a headwind. This raises the question: could this downturn represent a buying opportunity, and if so, which stock is the better investment?
Microsoft’s underlying business remains strong. In its fiscal second quarter, the company’s revenue surged 17% year over year, driven primarily by its intelligent cloud segment. This segment saw a remarkable 39% increase in revenue from “Azure and other cloud services.” However, the robust demand for AI services is mirrored in Microsoft’s backlog, which includes commercial remaining performance obligations (RPO) valued at $625 billion as of fiscal Q2, reflecting a 110% year-over-year increase.
Yet, potential investors may need to exercise caution. A significant portion of Microsoft’s commercial backlog—45%—is attributed to a single customer, OpenAI, which introduces customer concentration risk. Furthermore, the costs associated with securing this growth have escalated dramatically. Microsoft’s capital expenditures for the fiscal second quarter reached $37.5 billion, representing a 66% increase year over year. This substantial investment could impact future margins as it translates to depreciation over time.
In contrast, Amazon is also heavily investing in its operations, with capital expenditures expected to reach approximately $200 billion in 2026. CEO Andy Jassy highlighted this strategy in the company’s fourth-quarter earnings release, noting the need to capitalize on existing demand and new opportunities in AI, chips, robotics, and low Earth orbit satellites. Despite the heavy spending, Amazon’s cloud growth appears to be accelerating. In the fourth quarter, revenue from Amazon Web Services (AWS) surged 24% year over year to $35.6 billion, up from 20% growth in the prior quarter.
This momentum is reflected in Amazon’s overall financial performance, with the company reporting fourth-quarter operating income of $25 billion, an increase from $21.2 billion a year earlier. Additionally, Amazon’s diverse business model, which includes a sprawling e-commerce operation and a rapidly growing advertising segment, contributed to a 14% year-over-year rise in net sales, reaching $213.4 billion. Notably, Amazon’s strategic approach to AI hardware positions it favorably for the long term. Its aggressive scaling of custom silicon, including Trainium and Graviton chips, has led to a chip business with an annual revenue run rate of over $10 billion.
The better buy
When comparing the two tech giants, Amazon emerges as the clear winner. Both companies are trading at similar valuations, with Amazon’s price-to-earnings ratio around 29, while Microsoft’s is approximately 25. However, Amazon’s profit margins are arguably more resilient in the long term. Investors in software firms are accustomed to Microsoft’s historically high profit margins, but if the AI landscape transforms cloud computing into a capital-intensive, price-driven market, Microsoft could face significant challenges. Its elevated valuation leaves little room for error, especially if hefty infrastructure investments begin to impact profitability.
Conversely, Amazon operates with a retailer’s mindset, characterized by a lower-margin, high-volume business model that is structurally designed to withstand pricing pressures. The company is actively focused on reducing the costs associated with AI compute, positioning itself to compete effectively on price without compromising its economic model. Given AWS’s accelerating growth and Amazon’s track record of managing capital-intensive growth, the stock appears to offer a more favorable risk-reward profile for investors today.
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