Both Amazon (AMZN -1.72%) and Alphabet (GOOG -4.05%) (GOOGL -4.03%) just posted unbelievable quarters that sent shares soaring. While the one-time pop is nice, there are also several reasons to believe that a bigger rally could be in store for both stocks.
But which is the better buy now? Let's take a look and see which one makes the most sense.
Image source: Getty Images.
Both companies are seeing success in their approaches
Amazon and Alphabet may seem like odd companies to compare on the surface, but they're really quite similar. Amazon operates the world's largest commerce business and has dominated the e-commerce marketplace for some time. However, it also has a dominant cloud computing business that is a major cash cow for Amazon. In fact, Amazon Web Services (AWS) made up 60% of Amazon's operating profits during Q2.
NASDAQ: AMZN
Key Data Points
Alphabet has the Google family of products under its umbrella, which is primarily an advertising business. It, too, has a cloud computing wing that's producing incredible results, and it's even starting to get into chip sales with its in-house designed Tensor Processing Unit.
NASDAQ: GOOGL
Key Data Points
Both Alphabet and Amazon are taking a multifaceted approach to business, and using profits from their primary business units (commerce for Amazon and advertising for Alphabet) to fund data center build-outs to increase computing capacity for their most exciting business segment (cloud computing). These two are remarkably close, so I'm giving the business approach a tie.
Winner: Tie.
Alphabet is growing revenue faster
Alphabet has the fastest-growing business. In Q2, Alphabet's revenue rose at a 24% pace, and the all-important cloud division saw its revenue growth accelerate to a jaw-dropping 82% clip. Not to be outdone, Amazon delivered strong revenue growth of 20%, and AWS saw its growth accelerate to 37%. Make no mistake, these are solid results from both companies, but Amazon's revenue growth rate is skewed by its slow-growing commerce business.
Instead, I'd argue that investors should be looking at operating income growth, as that shows how fast each company's profit potential is growing.
GOOG Operating Income (Quarterly YoY Growth) data by YCharts
From this standpoint, Amazon is the much faster-growing company. As a result, I'm going to give this category to Amazon, as investors care more about profit growth than revenue growth at the end of the day.
Winner: Amazon.
Both companies have a similar valuation
Usually, I'd deploy an earnings-based metric to assess the valuation of two businesses. However, Alphabet had a major investment gain that it had to report as earnings, even though it hasn't sold yet. This skews valuation metrics, so comparing their price-to-operating-profit ratios is the next best thing.
Over the past three years, Amazon's valuation has come down while Alphabet's has risen.
GOOG Operating PE Ratio data by YCharts
This has priced the two stocks at nearly the same level, with Amazon being slightly more expensive. However, I don't think that's enough to give Alphabet the edge for being cheaper.
Winner: Tie.
Amazon is only a marginally better investment
In reality, both stocks are likely to outperform the market moving forward. However, at a score of one win and two ties, Amazon is just barely a better stock pick than Alphabet right now. The trend of Amazon's operating profits growing far faster than revenue will continue, as AWS becomes a larger and larger part of Amazon's total business. With its superior operational profile, this will translate into faster companywide profit growth and allow Amazon's profits to outpace revenue growth.
That's an explosive combination for a stock, and I think Amazon will be one of the greatest stocks to own over the next five years.
