Amazon (NASDAQ:AMZN) and Google's parent company Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) are two of the world's leading technology juggernauts. Amazon started as an online bookseller and has since expanded into the "everything store," leads the public cloud, e-book, and smart-speaker markets, and has emerging businesses in healthcare, global shipping, physical retail, and other areas. Google began with a clearly superior search product, expanded to dominate internet advertising globally, acquired DoubleClick, Android, and YouTube for what now seems like pocket change, and has the pole position in autonomous car technology. So which of these technology investments is the better buy today?
Google is one of the best businesses in the world
Alphabet's Google is hands-down one of the best businesses in the world. Its search business has dominant market shares in most countries globally. Many years ago, Microsoft's (NASDAQ:MSFT) Bing spent billions trying to put a dent in Google's search market share, to no avail. Google's moat is wide and the business has fantastic underlying characteristics. The company has used the prodigious cash flows generated from search and advertising to invest heavily in all sorts of diverse areas -- mapping the entire world down to the street, scanning every book in the world, leading autonomous car advancements, bringing internet access to underserved parts of the world via a network of balloons near the edge of space, leading cutting-edge artificial intelligence and machine-learning technologies, and even researching eternal life. Some of these bold bets may fail, but it seems likely that at least some of them will pay off in a big way over the long term.
The company's core revenue stream, Google advertising, generated $130 billion of revenue over the last 12 months. For context, the global advertising market is estimated by the World Advertising and Research Center to be $618 billion last year and $656 billion next year. That means Google commands something around 21% of the global advertising market, which itself is projected to grow at a 6.4% annual rate over the next 10 years. That's part of why I think Alphabet is an attractive investment, especially now that the company just tied CEO Sundar Pichai's incentive compensation to the total shareholder return of Alphabet's stock over the next two to three years.
Amazon's relentless, pioneering culture and massive addressable markets
Amazon has been wildly successful over the years. Warren Buffett has not been shy about his admiration for Amazon's founder and CEO Jeff Bezos, calling him "the most remarkable business person of our age." Buffett has also said:
I'm amazed at the managerial talent of Jeff Bezos. I've been a constant fan, really, almost since he started. And the more I see him, the more impressed I've been with what he's accomplished.
The primary driver of that success has been less about managerial brilliance, although that exists, and more about a deeply ingrained culture of invention. Amazon, more than any other company, invents brand new businesses from scratch. When the company fails, like it did with the Fire phone in 2014, it learns from its mistakes, makes adjustments, and either tries again or moves on. When it eventually succeeds, it creates big businesses like the third-party marketplace, Kindle, Amazon Web Services ("AWS"), and the Echo line of smart speaker devices. With Kindle, AWS, and Echo, Amazon created brand new industries that didn't previously exist -- and left its competitors scrambling to catch up.
What enables this pioneering culture is a sincere willingness to be misunderstood. In 2011, Bezos said the following at the company's shareholder meeting:
A big piece of the story we tell ourselves about who we are, is that we are willing to invent. We are willing to think long-term. We start with the customer and work backwards. And, very importantly, we are willing to be misunderstood for long periods of time. I believe if you don't have that set of things in your corporate culture, then you can't do large-scale invention.
You can see that willingness to be misunderstood in this tenet from Bezos's first letter to shareholders: "When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows." In other words, Amazon doesn't care about how profitable it appears on the surface to outsiders; it is happy to invest heavily, sacrificing near-term profits, if it means maximizing the value of the business over time.
This culture and track record, combined with competing in some of the world's largest addressable markets is a perfect recipe for shareholder value creation. Consider Amazon's core e-commerce business, which generated about $135 billion of net sales over the last 12 months. The global retail market in which it competes is estimated by eMarketer to be worth $25 trillion last year. That means Amazon's core business has only captured about 0.5% of its addressable market. So despite all its success, Amazon is only scratching the surface of its future opportunity, which means more growth to come. Then consider Amazon's ambitions in public cloud, healthcare, global logistics and parcel delivery, physical retail, voice search, advertising, devices, and the list goes on and on.
So while Alphabet appears to be a great buy, Amazon looks like the better buy -- due to its remarkable culture and track record of invention, combined with its larger addressable markets.