AMZN has outperformed GOOG over the years, while the latter has done better recently. Today, the Amazon Maven digs deeper into their businesses and discusses: which Big Tech stock is a better buy?
Thinking from a long-term perspective, Amazon stock has outperformed Alphabet stock: 320% gain over the last five years against Alphabet’s 260% climb. But more recently, Alphabet has crushed Amazon’s performance: 85% against 7% in the past 12 months. AMZN has lagged even the S&P 500 index, which delivered gains of around 30% since October 2020.
Alphabet produced nearly half of Amazon’s revenues in 2020, but twice its operating income. So, based on margins and earnings firepower alone, is it fair to say that GOOG is a better, more reasonable investment than its peer? The answer may not be so simple.
Business models
Amazon’s profits come primarily from its North America division (mostly e-commerce activity) and from the cloud division (Amazon Web Services, or AWS). Alphabet’s come from Google Services, most of which advertising. So, mark one win for Amazon here: the Seattle-based giant is the undisputed leader in two promising sectors: digital retail and cloud. Alphabet is the leader in only one, and its position has been threatened by the Bezos Empire itself.
Despite Amazon's advertising arm not yet being a main source of revenue, a report from emarketer shows the e-commerce titan has gained 250 basis points of market share between 2019 and 2020. Over the same period Google lost nearly as much, and it is estimated to give up another 220 basis points by 2023. This is still not enough for Alphabet to lose its title of online advertising king, but sufficient to catch our attention.
When it comes to cloud infrastructure and solutions, Alphabet is a challenger to Amazon. But here, Amazon is the clear winner: AWS has a market share of over 30% against Google Cloud’s 8%. Because scale is a key factor in this space, market penetration has been an important supporter of margins: Google Cloud is (still) not profitable, while AWS is very much so.
What experts say
Analysts seem to like both stocks, as Amazon and Alphabet have a consensus rating of “strong buy”. But the average price targets suggest that the gain opportunity is greater with the former: 22% vs. only 10%. It is possible that the higher price target on AMZN reflects recent share price weakness that provides an opportunity to buy the dip.
The most recent take from Wall Street on Alphabet comes from Credit Suisse’s analyst Stephen Ju. He has a $3,400 price target on GOOG, representing upside potential of 18.7%.According to Mr. Ju, recent product updates will translate into Google’s ability to accelerate revenue growth and maintain it for a long time.
Regarding Amazon,JP Morgan’s Doug Anmuth believes that the start of the holiday season combined with a possible hike in Amazon Prime’s price next year will help to uplift the stock. Mr. Anmuth thinks that AMZN is worth $4,100, suggesting nearly 20% upside.
Our opinion
Both Amazon and Alphabet are at the top of their games. However, Amazon seems to have a firmer grasp on two key growth engines: e-commerce and cloud. In addition, the Seattle company seems to have higher-growth DNA than its peer – think of the company’s approach of disrupting industries in which it does not have a strong footprint.
Therefore, from a growth investing perspective, Amazon stock seems to be the best option – although, granted, the Amazon Maven may be biased in its assessment. If GOOG could have been considered a good bet due to the stock’s much more reasonable valuations, a next-year P/E of 26 times today (vs. less than 18 times in October 2020) starts to look a bit stretched.
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