Pick Google Over Amazon?

We believe that Alphabet (NASDAQ: GOOG) is currently a better pick over Amazon stock (NASDAQ:AMZN). GOOG stock trades at 22x forward earnings, versus 42x for AMZN. We think this gap in valuation will narrow in favor of Google in the coming years, given its superior revenue growth and profitability. There is more to the comparison, and in the sections below, we discuss why we think Google will outperform Amazon in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. Google Stock Has Outperformed Amazon In The Last Three Years

GOOG stock has seen strong gains of 110% from levels of $85 in early January 2021 to around $180 now, vs. a 30% rise for AMZN from levels of $165 to around $215 over this period. In comparison, the broader S&P 500 index has seen an increase of about 60% over this roughly four-year period.

However, the changes in these stocks have been far from consistent. Returns for GOOG stock were 65% in 2021, -39% in 2022, and 59% in 2023, while that for AMZN was 2%, -50%, and 81%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that GOOG underperformed the S&P in 2022 and AMZN underperformed the S&P in 2021 and 2022.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights, such as META and IBM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

2. Google’s Revenue Growth Is Better

Alphabet has seen its revenue rise at an average annual rate of 19.9% from $183 billion in 2020 to $307 billion in 2023. On the other hand, Amazon’s average revenue growth rate of 14.3% from $386 billion to $575 billion over this period has been comparatively slower.

Google’s revenue growth over the recent years has been driven by its cloud business, which is seeing a strong momentum, with an average annual sales growth rate of 37% between 2020 and 2023. However, its contribution of 11% to the company’s total sales is much smaller than 56% for its Google search business.

Google makes money from contextual advertising on its search engine and its other properties, such as the video-sharing site YouTube. There is Google Cloud, which consists primarily of revenues from cloud offerings, including: Google Cloud Platform (GCP), G Suite productivity tools, and other enterprise cloud services. The company also has a self-driving car unit — Waymo — which is now seeing 150,000 weekly paid rides. Waymo could be the next big thing for Google. See how Waymo could be worth $5 trillion.

Lately, Amazon’s revenue growth is being driven by the long-term tailwinds in the e-commerce, streaming, and digital ad industries. With a whopping 38% share of all online retail sales in the U.S., Amazon is the clear leader in the e-commerce space. The company is leveraging its unmatched shopping platform to make money from ads, and it also makes money when the ads lead to product sales. The company’s cloud computing segment is a major growth engine for the company, closely followed by business in the North America and International segments.

The Amazon Web Services (AWS) business is a valuable segment for Amazon due to its superior growth rate and higher margins. AWS sales have risen at an average annual rate of 26.4% between 2020 and 2023, versus 14.3% for Amazon North America, and 8.6% for Amazon International. Amazon has spent years building out its vast empire, investing heavily in data centers, e-commerce infrastructure, and logistics. Investors, too, have had to be patient, watching as the company scaled up, at the expense of near-term profits.

Looking forward, while AWS remains the key growth driver for Amazon, the road ahead may not be smooth, primarily due to rising competition. Microsoft Azure and Google could have an edge in the AI race. Microsoft has made substantial investments in AI, including its deep partnership with OpenAI, which is likely to bolster its Azure cloud services. Similarly, Google Cloud’s generative AI offerings could also find favor as the company expands its services.

3. Google Is More Profitable

Alphabet’s operating margin has increased from 22.6% in 2020 to 27.4% in 2023, while that for Amazon has risen from 5.9% to 6.4% over this period. Looking at the last twelve-month period, Alphabet’s operating margin of 30.9% fares much better than 9.8% for Amazon.

Amazon’s long-term investments appear to be paying off. Its profitability is improving as it capitalizes on fast-growing areas like generative artificial intelligence, which have driven the expansion of AWS. Rising digital ad sales and improved cost management are also boosting margins.

4. What About Risks?

Looking at financial risk, Google fares better than Amazon, with its 1% debt as a percentage of equity being lower than 6% for the latter. Moreover, its 28% cash as a percentage of assets is higher than 15% for Amazon, implying that Google has a better debt position and more cash cushion.

Google is facing antitrust cases, alleging the company monopolized the marketplace and the general search services. The remedies could include a breakup of the company, which seems unlikely for now, regulatory oversight, and restrictions on businesses, among others. None of these would bode well for Alphabet’s businesses in the long term. As such, despite a strong growth visibility in the cloud business, on the back of AI demand, and continued ad revenue gains, investors have hesitated to assign a larger valuation multiple.

Recently, a report of a probe from the Consumer Financial Protection Bureau (CFPB) has emerged. The government agency is moving to place Google under formal federal supervision. ^[1]

Amazon is also grappling with legal challenges of its own. In a major lawsuit filed last year, the Federal Trade Commission (FTC) and 18 states accused Amazon of abusing its market dominance to inflate prices, overcharge sellers, and stifle competition. Beyond the U.S., Amazon is facing regulatory hurdles overseas as well.

5. The Net of It All

We see that Google has seen better revenue growth, is more profitable, and offers lower financial risk than Amazon. Now, looking at prospects, we believe Google remains the better choice of the two. At its current levels, GOOG stock is trading at 22x forward expected earnings of $8.05 on a per share and adjusted basis in 2024. The 22x figure is higher than the stock’s average P/E ratio of 19x over the past three years. However, a rise in valuation multiple for Google seems justified in our view, given the increase in demand for its cloud offerings and AI benefiting the company’s advertising business.

In comparison, at its current levels of around $215, Amazon stock trades at close to 42x expected 2024 earnings of $5.17 per share. This compares with around a 30x average P/E multiple for AMZN seen over the last two years. Now, we think that a higher valuation multiple for AMZN also seems justified, given that its past investments have started to pay off and the margins are now improving, thanks to AWS. Amazon’s current capital spending is focused toward supporting technology infrastructure to meet rising artificial intelligence (AI) demand. This focus on higher-return investments in technology rather than lower-return e-commerce infrastructure is a step in the right direction, which should help drive margins going forward.

Overall, we think that the AI boom will benefit both companies. Still, GOOG stock may offer better returns over the next three years, on the back of advancements in generative AI that should result in revenue growth accelerating. Also, its valuation multiple seems more attractive. Investors should also take into account the risks discussed above. The biggest obstacle for GOOG stock is its antitrust case, which could lead to a lower stock price in the event of an unfavorable development.

While GOOG may outperform AMZN in the next three years, it is helpful to see how Google’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 11/14/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios

See all Trefis Price Estimates

1. CFPB looks to place Google under federal supervision, setting up clash, Tony Romm, The Washington Post, Nov 14, 2024 [↩]