Why Alphabet Is the Preferred Choice Over Amazon Stock

Investors may find that Alphabet (NASDAQ: GOOG) currently offers a more favorable investment potential compared to Amazon (NASDAQ: AMZN). GOOG is trading at 22 times its expected earnings, whereas AMZN stands at 42 times. This significant valuation difference is expected to decrease as Alphabet demonstrates stronger revenue growth and profitability in the years to come. Below, we explore several factors that support our view that Google will surpass Amazon in the next three years, focusing on revenue growth, investment returns, and valuations.

1. Google Stock Outshines Amazon Over the Last Three Years

Since January 2021, GOOG stock has surged by 110%, rising from $85 to approximately $180. In contrast, AMZN has only increased 30%, moving from $165 to around $215. During the same timeframe, the broader S&P 500 index gained around 60%.

However, the performance of these stocks has not been steady. GOOG experienced returns of 65% in 2021, a decline of 39% in 2022, and a rebound of 59% in 2023. Meanwhile, AMZN saw modest growth of 2%, a hefty decrease of 50%, and an impressive increase of 81%, respectively. Over recent years, consistently outperforming the S&P 500 has been a challenge for many individual stocks, including GOOG, MSFT, and AAPL. Conversely, the Trefis High Quality (HQ) Portfolio—comprising 30 different stocks—has consistently outperformed the S&P 500 during this time, indicating more reliable returns with reduced risk.

2. Stronger Revenue Growth for Google

From 2020 to 2023, Alphabet’s revenue grew at an average annual rate of 19.9%, climbing from $183 billion to $307 billion. On the other hand, Amazon’s revenue growth rate was 14.3%, from $386 billion to $575 billion—substantially slower than Google’s growth.

One of the primary drivers behind Google’s revenue growth has been its cloud division, showcasing robust momentum with an impressive annual growth rate of 37% during the same period. Although its cloud business accounts for only 11% of total sales, it is a rapidly growing component compared to the more established Google search business, which makes up 56% of overall sales.

Revenue from various sources, including contextual advertising on Google Search and YouTube, continues to bolster Alphabet’s financial standing. Additionally, its self-driving car unit, Waymo, is gaining traction, now seeing around 150,000 weekly paid rides. Some analysts speculate that Waymo could be worth up to $5 trillion in the future.

Amazon, with a dominant 38% share of the U.S. online retail market, is benefiting from favorable trends in e-commerce, streaming, and digital advertising. Its cloud solution, Amazon Web Services (AWS), remains a key player, with sales growing at an annual average rate of 26.4% from 2020 to 2023. Amazon’s investments in its infrastructure have positioned it for long-term growth, but mounting competition from companies like Microsoft and Google in the AI space could complicate its future.

3. Alphabet’s Higher Profitability

Alphabet’s operating margin has improved from 22.6% in 2020 to 27.4% in 2023. In contrast, Amazon’s margin has only increased modestly from 5.9% to 6.4% during the same timeframe. For the most recent twelve-month period, Alphabet’s operating margin stands at a remarkable 30.9%, significantly higher than the 9.8% margin for Amazon.

Amazon’s ongoing investments are beginning to yield returns, particularly in fields like generative AI, enhancing the profitability of AWS and generating higher margins through increasing digital ad sales and improved cost management.

4. Analyzing Risks

When it comes to financial risk, Google has a more favorable profile. The company possesses a debt-to-equity ratio of 1%, significantly lower than Amazon’s 6%. Additionally, Google’s cash makes up 28% of its assets, compared to just 15% for Amazon. This stronger cash position lends Google a better buffer against financial downturns.

Despite these advantages, Alphabet faces significant antitrust scrutiny, with allegations of market monopolization. Potential outcomes could involve regulatory enforcement and oversight, posing risks to its future operations. A recent inquiry initiated by the Consumer Financial Protection Bureau (CFPB) may further signal future regulatory complications.

Amazon is not without its challenges either, facing a groundbreaking lawsuit from the Federal Trade Commission (FTC) and several states accusing it of exploiting market power to inflate prices and stifle competition, alongside international regulatory challenges.

5. Summary and Future Outlook

In summary, Google exhibits stronger revenue growth, greater profitability, and a lower financial risk profile compared to Amazon. Given these factors, we believe GOOG represents the superior investment choice currently. As it stands, GOOG stock is trading at 22 times expected earnings of $8.05 per share adjusted for 2024. This valuation is above its historical average of 19 times but is warranted by rising demand for Google Cloud and the impact of AI on its advertising revenue. Amazon, trading around $215, has a much higher valuation at 42 times expected 2024 earnings of $5.17 per share.