Through Google, the company now known as Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) is the de facto search engine in the digital lives of 73% of the planet. Residents of China are among the notable exceptions, and Chinese company Alibaba (NYSE:BABA) once attempted to take on China's top search engines (full disclosure: I worked with Alibaba on this as a consultant) before refocusing efforts on its e-commerce roots, where it dominates in China to this day.
If you reside in the United States, Google is an easily recognizable brand, while Alibaba may not be. Yet among technology stocks, both are alluring investments for different reasons. Let's take a look at each to determine which one deserves your investing dollars.
Growth beyond Google?
Alphabet's Google search engine may be at a mature stage in terms of usage, but not so for its revenue, which comes primarily from advertising. As companies shift advertising spend from offline media, like television, to digital channels, Alphabet reaps the rewards. Its advertising business enjoyed more than 20% growth for the last two full fiscal years.
Yet while Alphabet dominates online advertising, its other lines of business generate nowhere near its ad revenue's lofty heights. In Alphabet's last earnings release, for the quarter ended Sept. 30, 2019, the company captured over $40 billion in total revenue, with $33.9 billion coming from advertising.
The company's one bright spot outside advertising is its cloud computing services. CFO Ruth Porat shared that Alphabet's non-advertising revenue of $6.4 billion represented 39% year-over-year growth, "fueled by cloud." Despite the impressive growth, Alphabet's cloud revenue was less than the numbers competitors such as Oracle reported, and it has a long way to go before challenging the leaders in the space.
A look at Alibaba
Alibaba's opportunities are very different from Alphabet's. First, the Chinese company's primary line of business is e-commerce. This is an advantage in the China market, where Alphabet has no presence. That's because the Chinese middle class is estimated to be larger than the entire U.S. population, helping the country become the world's largest online retail market.
Moreover, China's e-commerce grew 17% year over year through the first nine months of 2019, according to CEO Daniel Zhang. This growth helped drive Alibaba's revenue, which increased 40% year over year in the company's last earnings report for the quarter ended Sept. 30, 2019.
Alibaba's next advantage is its greater success extending beyond its core revenue driver. Like Alphabet, Alibaba provides cloud computing services. And like Alphabet, revenue in this area grew by double-digits. But that's where the similarities end.
Alibaba's cloud computing revenue increased at a more impressive 64% year over year. In addition, this part of Alibaba's business represented 8% of the company's revenue, a far greater contributor to Alibaba's fortunes than is the case with Alphabet. And that's not all. Alibaba is the leader of China's cloud computing market with a 47% market share. These numbers indicate Alibaba's success in growing its cloud computing business compared to Alphabet.
As if leadership in e-commerce and cloud computing weren't enough, Alibaba also leads advertising in the China market. This makes sense since Alibaba ties advertising to its e-commerce business by offering merchants the opportunity to pay for higher placement on its websites.
Despite the impressive performance, Alibaba's dominance in the key China market is not unblemished. Aside from its e-commerce component, the company's other lines of business are not profitable. Alibaba's reliance on e-commerce to fund growth in other areas would be at risk in an economic downturn. Also, the company's fortunes are tied to China's economy, which make Alibaba vulnerable to factors like the recent trade war.
Which is the better investment
Both Alphabet and Alibaba possess impressive strengths. Deciding between the two is tough, and it depends in part on your comfort level in investing in Chinese companies. Ultimately, either company is a worthwhile investment.
But in this head-to-head match-up, Alibaba's superior diversification of its lines of business, leadership in the key growth industries of e-commerce and cloud computing (which offer more stability, and in the case of the latter, reliable recurring revenues, than advertising), and the economic potential of the Chinese market tip the title of the "better buy" in Alibaba's favor.