This article is based on a piece originally published at fool.com (Motley Fool) in September 2019. Financial figures reflect conditions as of that date and should not be used as current investment guidance.
Two Unavoidable Tech Giants
Amazon and Alphabet (Google’s parent company) are two of the most consequential businesses in modern technology. Amazon dominates U.S. e-commerce and cloud infrastructure through Amazon Web Services (AWS), while Google’s search engine is so culturally embedded that its name became a verb. Both companies held market capitalizations close to $1 trillion as of late 2019 and were core components of the FANG group of high-growth tech stocks that drove much of the bull market’s gains through the 2010s.
Despite their similarities in scale, the two companies have very different financial profiles, business strategies, and risk characteristics — which means the “better buy” question is worth examining carefully.
Amazon: The Boundless Disruptor
Amazon’s defining characteristic as a business — and as a stock — is its willingness to enter entirely new markets and accept short-term losses in exchange for long-term dominance. The company has repeatedly demonstrated this pattern across e-commerce, digital books and tablets, video streaming, voice-activated assistants (Alexa), and cloud computing.
As recently as 2014, Amazon reported a net loss. By 2018, net income had reached approximately $10 billion, driven largely by the explosive profitability of AWS. That turnaround reflects founder Jeff Bezos’s long-standing philosophy of investing aggressively in competitive moats even at the cost of near-term earnings.
In 2019, Amazon announced it would shorten free delivery for Prime members from two days to one day — an expensive undertaking that pressured short-term profits, but one that investors largely welcomed as a move that would deepen customer loyalty and widen its e-commerce lead.
At the time of writing, Amazon traded at a price-to-earnings (P/E) ratio of approximately 72 — a premium valuation that reflects investor confidence in its continued reinvestment and growth trajectory. The company was also beginning to expand into healthcare, with the launch of Amazon Care as an internal pilot program for employees, with potential future expansion to the broader public.
Amazon’s Key Strengths (as of 2019)
- AWS: The market-leading cloud platform, generating the majority of Amazon’s operating profit.
- Prime ecosystem: Subscription-based loyalty spanning shopping, video, music, and logistics.
- Optionality: A demonstrated ability to enter and quickly scale new industries.
- Long-term investing culture: Management willing to sacrifice near-term margins for durable competitive advantages.
Alphabet (Google): The Advertising Gold Mine
Google was founded in 1998 — arriving relatively late to the dot-com era — but its search engine quickly became the dominant way people navigate the internet. That search dominance translated into an extraordinarily profitable advertising business. In 2018, Alphabet reported approximately $116 billion in advertising revenue, representing around 85% of its total revenue of $137 billion. Net income exceeded $30 billion that year.
Alphabet uses the cash flow from its core search and advertising business to fund a portfolio of ambitious longer-term projects it calls “Other Bets.” These include:
- Waymo: Alphabet’s autonomous vehicle unit, considered one of the technology leaders in self-driving systems.
- Google Fiber: A broadband internet and cable service.
- GV (formerly Google Ventures): Alphabet’s venture capital arm.
In 2018, the Other Bets segment generated approximately $595 million in revenue against an operating loss of around $3.4 billion — a deliberate investment in future platforms. Waymo alone was widely valued at over $100 billion by analysts at the time, though that figure was speculative and based on projected autonomous vehicle market potential.
Unlike Amazon, Alphabet’s valuation was far more conservative. It traded at a P/E ratio of approximately 25 as of late 2019 — close to the broader market average. The company also held roughly $121 billion in cash and marketable securities on its balance sheet, prompting some investor discussion about whether Alphabet should initiate a dividend.
Alphabet’s Key Strengths (as of 2019)
- Search monopoly: Google processes the vast majority of internet search queries globally, giving it unmatched advertising pricing power.
- Diversified properties: YouTube, Gmail, Chrome, Android, and Google Maps provide multiple high-traffic platforms.
- Cash reserves: Over $120 billion in liquid assets provides a significant financial cushion and acquisition firepower.
- Reasonable valuation: A lower P/E ratio relative to Amazon makes it more attractive to value-oriented investors.
- Google Cloud: A growing enterprise cloud platform competing with AWS and Microsoft Azure.
Head-to-Head Comparison
| Factor | Amazon | Alphabet (Google) |
|---|---|---|
| Primary revenue source | E-commerce, AWS, advertising | Search advertising |
| 2018 net income (approx.) | ~$10 billion | ~$30 billion |
| P/E ratio (late 2019) | ~72 | ~25 |
| Cash reserves | Lower relative to Alphabet | ~$121 billion |
| Cloud business | AWS — market leader | Google Cloud — growing challenger |
| Growth optionality | Very high (healthcare, logistics, etc.) | Moderate (Other Bets, cloud) |
| Investor appeal | Growth investors | Value and growth investors |
Which Is the Better Buy?
The answer depends heavily on your investing philosophy and time horizon.
Amazon commands a significant valuation premium, but that premium reflects a track record of entering new markets and building dominant positions. AWS, in particular, is the clearest example: Amazon turned cloud infrastructure into its single most profitable business segment, now a critical piece of the internet’s plumbing. If you believe Amazon will replicate that pattern in healthcare, logistics, or other sectors, the higher P/E may be justified.
Alphabet, by contrast, offers a more stable, cash-rich balance sheet and a lower valuation entry point. Its advertising business has proven remarkably durable, and Google Cloud, while trailing AWS, was growing rapidly. For investors who want exposure to big tech at a more defensible price, Alphabet has historically been the more conservative choice.
The original Motley Fool analysis (September 2019) favored Amazon as the better long-term pick, citing its superior optionality and history of disruption — while acknowledging that both companies are likely to outperform the broader market over the long term.
Important Caveats for Today’s Readers
This analysis was written in September 2019. The technology landscape, both companies’ financial results, and their respective valuations have changed substantially since then. Amazon has continued to grow AWS and its advertising business significantly. Alphabet has expanded Google Cloud and faced regulatory scrutiny in multiple jurisdictions. Neither stock price, P/E ratio, nor cash balance cited above should be treated as current data.
Before making any investment decision, consult up-to-date financial filings, analyst reports, and — where appropriate — a qualified financial advisor.
Original source: The Motley Fool (fool.com). Attribution preserved per original post.