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Better Buy:, Inc. vs. Google

By Daniel Sparks – Feb 19, 2016 at 10:01AM

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They're both great companies. And they are both growing fast. But which stock is a better buy?

In a previous article, I concluded Amazon (AMZN -1.57%) is a better investment than Netflix. But is Amazon a better buy than tech giant Alphabet (GOOG -1.98%) (GOOGL -1.82%) -- the parent company of Google?

Both stocks are trading lower than they were a few months ago following an early 2016 sell-off, making it a particularly good time to compare the two to see if either offers a more enticing entry point. Alphabet stock is down about 7% year-to-date, and Amazon has been hit particularly hard, losing more than a fifth of its value, down 21% in the same period.

Any investor considering Amazon first needs to understand that an investment in this stock means betting on a wildly optimistic outlook for the company's future -- a future that must bring both rapid sales growth and greater profitability in order to justify the current stock price.

For perspective on the optimism priced into the stock, consider the difference in Amazon and Alphabet's valuation. Amazon's profits are nearly non-existent compared to Alphabet yet Amazon's market capitalization of $251 billion is over half of Alphabet's $488 billion market cap. During 2015, Amazon earned just $596 million on $107 million in revenue. Comparatively, Alphabet earned $16.3 billion on $75 billion in revenue. Clearly, the market expects considerable earnings growth from Amazon going forward.

Notably, however, Amazon is beginning to prove to investors that management can beef up profits quickly. Operating income increased from $178 million to $2.2 billion in 2015, and free cash flow soared 276% during the same period.

Despite Amazon's much pricier valuation, evidenced by its far greater market capitalization-to-earnings ratio, Alphabet's growth isn't lagging Amazon's as much as investors might expect. Alphabet's sales are up 14% in the trailing-12-months. Meanwhile, Amazon's sales are up 20% during the same period. Even more, Alphabet's revenue growth actually accelerated in the company's most recent quarter, suggesting its catalysts for growth are healthy. Q4 revenue was up 18% from the year-ago quarter, or 24% in constant currency.

Also worth noting, Alphabet's trailing-12-month EPS growth is outpacing its revenue growth, with annual EPS up 15% compared to the year-ago quarter.

Image source: YouTube.

Further, Alphabet faces several growth opportunities going forward -- particularly continued growth in mobile search and the rising popularity of YouTube among both users and advertisers. For instance, YouTube viewing time more than doubled in 2015 and management noted in its most recent earning report that strength in mobile search was the primary driver for 20% year-over-year revenue growth in Google sites revenue -- a segment which represents the lion's share of Alphabet's overall operating profits.

So, with Alphabet, investors still get to buy into growth -- albeit less growth than what Amazon is seeing -- while getting this growth at a far cheaper valuation and with less speculation priced into the stock.

While it's definitely possible that Amazon could continue growing faster than Alphabet over the long haul, Alphabet's more conservative valuation paired with its more robust earnings makes the stock look like the better bet for investors over the long haul. Of course, this doesn't rule out Amazon as an investment. But Alphabet just might be the better bet.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
$95.65 (-1.82%) $-1.77, Inc. Stock Quote, Inc.
$113.00 (-1.57%) $-1.80
Alphabet Inc. Stock Quote
Alphabet Inc.
$96.15 (-1.98%) $-1.94

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