Given how much impact the tech sector has on the U.S. and global economies these days -- a trend that might become even more prominent in the years and decades ahead -- it's important that investors allocate some portion of their portfolios to these kinds of businesses. This smart strategy can certainly help to boost portfolio returns over the long haul.
Amazon (AMZN -1.30%) and Alphabet (GOOG -0.04%) (GOOGL -0.16%) are two great options to consider. They each possess very favorable traits that make them worthy investment candidates. But which of these "Magnificent Seven" stocks is the best one to buy right now?
Amazon's sprawling empire
What makes Amazon unique is that it has its hands in multiple tech-driven markets. For instance, the company is the undisputed leader in online shopping. As the economy expands, spending activity increases, and more transactions shift away from brick-and-mortar retailers, Amazon will keep gaining.
The business is involved in a more exciting area, with Amazon Web Services (AWS) being the leading cloud computing platform in the world. AWS has become an essential partner for its customers, as they move their IT workloads off-premises and leverage artificial intelligence (AI) tools more. It's contributing more to the overall company's finances, with annualized revenue of $124 billion in the second quarter (ended June 30) and a stellar operating margin of 32.9%. Investors might be interested in owning this stock simply to have exposure to AWS.
Digital advertising is another high-potential area that Amazon has a strong position in. It helped produce almost $16 billion in revenue in the most recent quarter, which represented a 22% year-over-year increase. Just in the U.S., Amazon's ad services can reach an audience of more than 300 million people.
It's already a colossal organization. And Amazon is in a good position to keep growing at healthy clip for a long time.
Alphabet leads the AI race
Alphabet is a top choice for investors who want greater exposure to the AI boom. Given the huge capital investments taking place, as well as the general bullishness surrounding this trend, betting on AI seems like a smart move.
Alphabet is involved in many parts of this powerful secular trend. It works on AI research at DeepMind. It develops its own chips, having a presence in infrastructure hardware.
With Google Cloud, which is a direct competitor to AWS, Alphabet has a key platform that serves AI needs of its customers. The company's Gemini large language models are embedded into its user-facing apps. And Alphabet is leveraging AI to improve capabilities for its advertising customers.
While the market seemed to be worried at first that AI was going to dismantle Alphabet, the business is performing well. Revenue and operating income both increased by 14% during the second quarter. Google Search, the company's bread and butter, saw sales rise 12%. Management points to strong adoption of the product's AI Mode feature.
The business is in an enviable position. It possesses many durable competitive advantages, like network effects and its unrivaled ability to collect and leverage data. Plus, it has a fortress balance sheet that minimizes financial risk.
Think about upside
Amazon and Alphabet are two of the best businesses in the world. They dominate the markets that they operate in, and that isn't going to change anytime soon.
Investors should consider the potential upside over the next five years and beyond. Profit growth is one important area to look at. According to Wall Street consensus analyst estimates, Amazon's earnings per share are projected to increase at a compound annual rate of 18.6% between 2024 and 2027, higher than Alphabet's expected 14.6% yearly pace.
Valuation is also another critical component. Amazon shares trade at a forward price-to-earnings ratio of 28.2. Alphabet's trade at a cheaper multiple of 23.4.
I don't see why investors can't own both of these wonderful companies.
