Over the last few years, Amazon (AMZN +0.20%) and Google, a subsidiary of Alphabet (GOOG +2.70%) (GOOGL +2.79%), have started looking more and more similar. The two compete in the cloud-computing, smart speaker, and digital advertising markets. In fact, Alphabet's former executive chairman, Eric Schmidt, was calling Amazon Google's biggest competitor as far back as 2014.
Investors interested in the two mega cap stocks could do well with either one. I personally own shares of both companies, but if you're dead-set on just one stock, which should it be, Amazon or Alphabet?
Image source: Amazon.com.
Amazon has some massive competitive advantages
Amazon's biggest advantage over other retailers is its huge distribution network. The company has spent 20 years building out a network of warehouses and fulfillment centers designed to get packages to customers' doors as quickly as possible. Brick-and-mortar competitors might have logistics networks focused on delivering items to their stores, but they're still catching up when it comes to shipping individual orders to people's homes.
Amazon's distribution network allows it to fulfill orders faster and cheaper than the competition. Amazon passes those savings on to customers, but its biggest coup has been its Prime membership, which allows members to pay up front for unlimited 2-day delivery. Amazon currently charges $119 per year for Prime in the United States, and it has over 100 million Prime members globally.
Prime creates a network effect for Amazon's marketplace. One-hundred million members make Amazon their first stop for online product searches. Last year, Amazon accounted for nearly half of all online product searches, beating out Google and other search engines.
That kind of traffic is extremely attractive to third-party merchants. It's no surprise that sales of third-party merchant services have grown considerably faster than Amazon's own retail sales in the last few years. The growth of third-party merchants on Amazon makes its product selection superior to nearly every other site, reinforcing consumers' behavior of beginning their online product searches on Amazon.com.
Finally, Amazon Web Services, Amazon's cloud-computing business, benefits from massive scale. Excluding software-as-a-service sales (like Google's G Suite), Amazon owns about half of the entire cloud-computing market. That scale allows it to maintain competitive pricing, invest in new products (it offers more services than anyone in the industry), and produce strong profit margins.
Image source: Google.
Google is a data monster
Google has some massive competitive advantages of its own.
Its best-in-class internet search engine attracts practically every internet search on the planet outside of China. That search engine is supported by proprietary algorithms and machine-learning artificial intelligence (AI).
Google has an even bigger advantage in search on mobile devices as it benefits from the popularity of its Android operating system and pays other mobile browsers a fee to make Google their default search engine. Google accounted for over 92% of internet searches in September.
The omnipresence of Google's search engine has also helped it build other popular products. The company has eight products with over 1 billion users: Search, Android, Google Play, Gmail, Maps, Chrome, YouTube, and Drive.
That kind of scale provides significant advantages. For Android and Google Play, it attracts developers to the respective platforms, creating a broader marketplace of apps and games and generating more opportunities for Google to make sales.
For YouTube, it attracts content creators, and an increasing amount of fresh and original content keeps the audience coming back. The company has used YouTube's audience as a launching pad for several premium subscription products including YouTube TV and YouTube Music.
A diverse user base in which most individuals use multiple products enables Google to collect very personalized data. What's more, the company's user engagement presents tons of opportunities for Google for targeted advertising. On the other side of the network, Google has built a massive base of advertisers. Many advertisers are able to get excellent results from Google because it's capable of showing ads to the right person at the right time in the right context. Few other competitors can offer that service.
Great growth prospects for both
Amazon and Google are both leaders in markets with excellent growth trends.
Global e-commerce sales will more than double between 2017 and 2021, according to estimates from eMarketer. Amazon is set to capture a significant share of that growth thanks to the popularity of Prime.
Likewise, digital advertising will grow at a similar rate over the next five years, according to data compiled by Statista. Google's ability to produce a higher return on investment for marketers than smaller competitors could help it produce continued market-share gains over that period as well. But Amazon, interestingly enough, presents a challenge to Google's dominance.
Meanwhile, public cloud-computing services are growing just as fast, and will practically double between 2017 and 2021, according to data from Gartner. Google has notably been taking share in the industry, but Amazon is holding its own despite its already-massive market share.
The competitive advantages of each company and the fast-growing industries in which they operate make both companies' stocks extremely appealing for growth investors.
Valuation
A discussion of valuation is necessary for a complete side-by-side comparison of both stocks. Let's take a quick look.
|
Metric |
Amazon |
Alphabet (C Shares) |
|---|---|---|
|
P/E |
141.5 |
47.9 |
|
Forward P/E |
101.7 |
23.7 |
|
P/FCF |
100.5 |
39.4 |
Data source: YCharts. P/E = Price to earnings. P/FCF = Price to free cash flow.
Alphabet is much less expensive from a valuation standpoint. That may be the case indefinitely as Amazon CEO Jeff Bezos endeavors to keep investing as much as possible back into the business to keep growing. Investors interested in Amazon are paying a premium for growth and to have Jeff Bezos as CEO, who has proven to continuously develop lucrative new businesses at Amazon.
Alphabet shares are by no means cheap when compared to other internet services businesses. The company is priced considerably higher than Facebook, for example, on all three metrics. But the premium paid is minimal compared to the difference between Alphabet and Amazon.
Both companies have great growth prospects and more than enough competitive advantages to benefit from the secular growth in their respective industries. If the valuation concerns you, buy Alphabet shares, but if you're more bullish on e-commerce and cloud computing, Amazon might suit you better.
