Written by: Rita

The combined revenue of the four major cloud providers in the second quarter reached $103.8 billion, a year-on-year increase of 50%, accelerating from 41% in the previous quarter. Microsoft Azure grew by 43% (39% last quarter), Amazon AWS grew by 37% (28% last quarter), Google Cloud grew by 82% (63% last quarter), and Oracle OCI grew by 92% (81% last quarter). Citigroup research noted in a report on July 31 that the monetization efficiency of AI infrastructure is improving, with revenue growth outpacing capital expenditure growth. Citigroup's core judgment is: AI investment by cloud providers has moved past the pure burn phase, and capital expenditures are being absorbed by revenues.

Capital expenditures are also rising in tandem. The four major cloud providers increased their capex by about $20 billion quarter-on-quarter, with Microsoft, Amazon, and Google collectively exceeding $100 billion. Citigroup maintains a buy rating for Microsoft, Amazon, Google, and Oracle, with target prices of $600, $350, $447, and $330, respectively.

Cloud revenue accelerates across the board, with Google Cloud and AWS leading the charge

In the second quarter, the four major cloud providers generated a total revenue of $103.8 billion, a year-on-year increase of 50%, with incremental revenue reaching $35 billion. AWS contributed approximately $11.4 billion in incremental revenue, Google Cloud approximately $11.1 billion, Microsoft Azure approximately $9.3 billion, and OCI approximately $3.2 billion.

AWS holds a 41% market share, remaining the market leader. Google Cloud increased its share from 22.6% to 24%, marking the fastest growth in share. Azure remains steady at 30%, and OCI increased to 5.6%. AWS's AI business annualized revenue grew from $15 billion in Q1 to $25 billion, with its chip business also reaching $25 billion in annualized revenue. Bedrock customer spending surpassed the total of all previous quarters combined. AWS also signed a $100 billion AI lab computing contract.

Google Cloud's growth rate jumped from 63% to 82%, with TPU sales contributing, but the core GCP growth rate is also improving. Google disclosed that nearly 90% of Fortune 100 companies are using Gemini Enterprise, and token usage increased by 37.5% quarter-over-quarter to 22 billion tokens per minute. Actual customer spending exceeded initial commitments by more than 50%, up from 45% in the previous quarter.

Azure's growth rate accelerated from 39% to 43%, primarily driven by improved computing efficiency rather than capacity expansion. Microsoft added 1 GW of computing capacity during the quarter, improving unit output efficiency through optimizations at the software and infrastructure levels. Azure's commercial bookings grew by 11%, with a 18% growth rate excluding OpenAI-related contracts.

OCI's growth rate accelerated from 81% to 92%, with a market share of only 5.6%, but it leads in growth rate. Oracle's distributed cloud strategy is accommodating incremental AI workloads.

Capital expenditures rise simultaneously, but operating leverage mitigates pressure

AWS's capex in the second quarter was approximately $40 billion, a year-on-year increase of 83%, accounting for 74% of Amazon's total capex. Azure's was approximately $38.3 billion, and Google Cloud's was approximately $22 billion, a year-on-year increase of 100%. The three companies together exceeded $100 billion in capex for the quarter, with a combined quarter-on-quarter increase of about $20 billion.

Operating profit margins did not worsen. AWS's profit margin was 39.4%, and 38.1% after excluding one-time derivative gains, which is higher than Citigroup's expectation of 33.5% and also higher than the previous quarter's 37.7%. Google Cloud's profit margin was 35.6%, up 15 percentage points year-on-year, and improved by 270 basis points quarter-on-quarter. Microsoft Cloud's gross margin was 65%, which is 1 percentage point higher than the guidance. Operating leverage is mitigating the gross margin pressure caused by depreciation and expansion.

Citigroup believes this trend can be sustained. Revenue growth (50%) is outpacing capex growth, with incremental revenues expanding, and scale effects are being released. The monetization efficiency of AI infrastructure is accelerating faster than the market anticipates. AWS's AI annualized revenue almost doubled from $15 billion to $25 billion in just three months, and Google's token usage grew 37.5% quarter-over-quarter; these are not one-off events but signals of an accelerating trend.

Backlogs validate long-term demand for AI

AWS's backlog increased by 154% to $496 billion, with a quarterly increase of $132 billion. Google Cloud's backlog approached $514 billion, a year-on-year increase of $40.8 billion. Microsoft's remaining performance obligations grew by 25%. Citigroup believes that the rapid growth in orders validates the persistence of AI demand; these are not one-off contracts but long-term commitments, indicating an increasing revenue visibility for the next few quarters.

Citigroup's target prices and valuation logic for the four companies are as follows. Microsoft $600, corresponding to about 26 times earnings per share for the fiscal year 2028, with Azure's acceleration and Copilot monetization as the main drivers; Citigroup believes Microsoft has the most comprehensive layout in the AI field among cloud providers. Amazon $350, corresponding to about 31.5 times expected earnings per share for 2027, with AWS AI annualized revenue of $25 billion supporting valuation, and improvements in retail business profits also contributing incremental revenue. Google $447, corresponding to about 28 times earnings per share for 2027, with the re-acceleration of cloud growth as the basis for premium, and AI innovations in the search business enhancing user stickiness. Oracle $330, corresponding to about 20 times earnings per share for the fiscal year 2030, with OCI backlog providing revenue visibility; Citigroup believes Oracle is becoming a new platform for accommodating AI workloads.

Cloud providers’ capex is rising, revenues are also rising, and orders continue to increase. Citigroup believes the monetization logic of AI is being validated quarter by quarter, revenue growth has outpaced capital expenditure growth, and capital expenditures are not wasted. AWS's AI annualized revenue nearly doubled in three months, Google's token usage is still accelerating, and the operating profit margins of cloud providers are not declining but rather increasing. The market's previous concern that "high capex would crush profits" is being disproven by data.

Disclaimer

This article is a compilation and interpretation of third-party brokerage research reports (Citigroup Research, July 31, 2026) by Chao Xiang Research, combined with public market information. The ratings, target prices, earnings forecasts, and related judgments cited in this article are the views of the brokerage's analysts and represent only the position of their respective organizations, not the views of Chao Xiang Research, nor do they constitute any investment advice.

The market has risks; decisions must be independent. This article should not be used as the basis for buying or selling any securities.