Amazon (AMZN 0.26%) and Alphabet (GOOG -3.30%) (GOOGL -3.36%), the parent company of Google, are both considered by many to be sound investments for long-term investors. After all, Amazon owns the world's largest e-commerce and cloud infrastructure platforms, while Google controls the largest search engine and streaming video platform.
But over the past 12 months, Amazon's stock sank 36% as Alphabet's stock dropped 28%. Both stocks tumbled as macro headwinds threatened their core businesses, while rising interest rates accelerated those declines by driving investors toward more conservative investments. Could either of these fallen tech giants recover this year?
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The differences between Amazon and Alphabet
Amazon generates most of its revenue from its e-commerce platform, but most of its profits come from its cloud platform Amazon Web Services (AWS). According to Canalys, AWS controlled 32% of the cloud infrastructure market in the fourth quarter of 2022, while its closest competitor, Microsoft Azure, held a 23% share.
Alphabet generates most of its revenue and all of its profits from Google's advertising business, which consists of its core search engine, advertising network, and YouTube. The rest of its revenue mainly comes from Google's hardware, subscription-based services, and Google Cloud, which ranks third in the cloud platform race with a 10% share in the fourth quarter.
Both companies face near-term macro challenges
Amazon and Alphabet are both highly exposed to inflation and other macro headwinds. For Amazon, inflation has been curbing consumer spending on its e-commerce platform, which had already faced tough year-over-year comparisons as the pandemic passed. The tough macro environment also forced large companies to postpone big cloud deals with AWS.
The simultaneous slowdown of those two businesses is worrisome since Amazon usually subsidizes the growth of its lower-margin retail business with its higher-margin cloud revenue. Therefore, slower cloud spending could force Amazon to cut costs more aggressively at its retail business and use fewer loss-leading strategies to expand its Prime ecosystem.
For Alphabet, the macro headwinds forced businesses to rein in their ad purchases. Stiff competition from "open internet" alternatives like The Trade Desk, which sells ad space across mobile, desktop, and connected TV platforms that aren't tethered to Google and other tech giants, could also be loosening Alphabet's iron grip on digital ads.
The slower growth of Google's advertising business could make it more difficult to expand its unprofitable hardware and cloud businesses. And unlike AWS, Google Cloud will likely remain unprofitable because it lacks AWS' scale and pricing power.
Which company will grow faster?
Amazon's revenue rose 9% to $514 billion in 2022, but it racked up a net loss of $2.7 billion -- compared to a net profit of $33.4 billion in 2021 -- due to its shrinking operating margins and a $12.7 billion paper loss from its equity investment in the electric vehicle maker Rivian Automotive. Amazon doesn't plan to divest that stake anytime soon.
Amazon expects its growth to remain sluggish this year, but it's downsizing its workforce, shutting down some of its weaker brick-and-mortar stores, and reducing its other expenses. Its profits could also rise if Rivian's stock price bounces back.
Analysts expect Amazon's revenue to rise 8% this year as it returns to profitability. Its stock might seem expensive at 58 times forward earnings -- but it's actually historically cheap relative to its revenue at less than 2 times this year's sales.
Alphabet's revenue rose 10% to $283 billion in 2022, but its net income declined 21% to $60 billion. The aforementioned headwinds for its advertising business squeezed its operating margins, which forced it to hastily lay off thousands of workers and rein in its spending. The recent resignation of YouTube CEO Susan Wojcicki, who had led the streaming video platform since 2014, also raised troubling questions about the division's slowing growth and competition from ByteDance's TikTok.
Alphabet expects 2023 to be another tough year, and its core search business could face additional pressure from Microsoft, which is integrating OpenAI's powerful ChatGPT chatbot into its Bing search engine and other services. Amazon's growing advertising business could also pull businesses away from Google.
But despite all those challenges, analysts still expect Alphabet's revenue and earnings to rise 6% and 12%, respectively, this year as its advertising business stabilizes. Those are steady growth rates for a stock that trades at 18 times forward earnings and 4 times this year's sales -- and its bottom line isn't weighed down by a struggling EV maker like Rivian.
Which FAANG stock is the better buy right now?
I personally own both of these FAANG stocks, and I expect them to remain under pressure for at least a few more quarters. But if I had to buy more shares of one over the other, I'd accumulate more shares of Alphabet instead of Amazon for three reasons: Its growth rates are more stable, its business model is simpler, and its stock is cheaper.
