Alphabet Stock vs Amazon: Which Is Best?

Amazon and Alphabet, parent to Google, are two of the biggest companies of all time. Even after losing billions in value during the great tech selloff of 2022, they have massive market caps of $1.01 trillion and $1.22 trillion, respectively.

Both have played a critical role in building the digital world from the very earliest days of the internet. More importantly, both are known for their constant, unrelenting innovation that promises to further transform daily life.

After 2022’s shocking drop in tech stock values, most investors agree that it is unwise to devote too much of an individual portfolio to the tech sector – even when exposure is limited to winners like Amazon and Alphabet. So, that brings up a difficult question: Alphabet stock vs. Amazon – which is best?

Will AMZN Go Up?

Amazon was already a strong performer pre-2020 but the rate of growth realized during the pandemic wasn’t sustainable. As the world returned to a state of normalcy, Amazon’s revenue stabilized. That made year-over-year comparisons appear rather dismal, which contributed to the decline in stock price.

However, most of the factors that caused Amazon’s losses weren’t specific to the company – they were the same external factors affecting all tech and retail businesses. High inflation prompted consumers to rein in spending, but Amazon still had to cover its expenses – payroll and inventory, for example.

The price of those essentials increased along with inflation, so the company had lower sales volume at the same time that operations became more costly.

Meanwhile, in an effort to get inflation under control, interest rates started to climb. Rising interest rates alarmed investors, who responded by shifting assets from higher-risk growth companies to safer options such as energy and healthcare.

The tech sector is generally considered a higher-risk investment, and most tech companies fall into the growth category. Amazon, along with most of its tech peers, lost a substantial portion of its value.

Investors who live by Warren Buffett’s investment strategy of being “fearful when others are greedy and greedy when others are fearful” should consider Amazon’s current low price an opportunity to buy Amazon stock at a discount. There is little doubt that Amazon stock will go up because it remains a leader in multiple high-growth markets.

Amazon is the clear winner when it comes to e-commerce, and it continues to improve efficiency and expand into complementary services. For example, Amazon customers can now use their Amazon accounts to checkout with certain third-party merchants through Amazon Pay.

Shoppers get the convenience of using saved address and payment information, along with the added benefit of free shipping. Participating merchants also get a win – fewer abandoned carts – since the most common reason for shoppers to reconsider their purchases is related to shipping fees.

What makes Amazon such an extraordinary company is that e-commerce isn’t its only area of expertise. Amazon Web Services (AWS) was the first true cloud computing company, and it holds more of the cloud computing market than its next two competitors (Microsoft Azure and Google Cloud) combined.

AWS contributes to the company’s total revenue, which is helpful in offsetting downturns in the e-commerce market. It’s worth noting that Google Cloud isn’t yet profitable – a fact that gives many current and prospective Alphabet investors pause.

By our math, Amazon has an intrinsic value of $119 per share, suggesting north of 22% upside from current share price levels.

Clearly, Amazon stock is a buy. Can the same be said about Alphabet?

Is GOOG A Buy?

Google isn’t just a search engine – it’s THE search engine. It has a near-monopoly on search engine traffic almost everywhere in the world. That makes the platform a goldmine for marketing, and the company’s digital advertising revenue has delivered generous profits for years.

Parent company Alphabet has long relied on Google’s ad revenue to offset investments in other projects – particularly Google Cloud.

In addition to the general effects of high inflation and rising interest rates that pushed other tech stocks down, Google’s ad revenue suffered as a result of these external factors. Normally, businesses look at payroll expenses when they need to trim their budgets, but this bear market had an unusually tight labor market to contend with.

Layoffs were unappealing under the circumstances, so many companies pulled funds from marketing budgets. That meant less cash coming in for Alphabet.

Alphabet is working hard at expanding its revenue streams. It is particularly focused on growing Google Cloud, and it has a number of Artificial Intelligence (AI) projects in progress. The trouble is that developing this technology is expensive, and these projects aren’t yet profitable. That doesn’t look good for Alphabet’s bottom-line results, though no one believes Alphabet will stay down for long.

Google Cloud is growing, and most industry experts believe it will be profitable in the relatively near future. From there, it is likely to continue on its growth trajectory until it eventually makes a substantial contribution to Alphabet’s top and bottom line results.

In other words, Alphabet’s core business – the Google search engine and related advertising – might be mature, but Alphabet remains a growth stock. Its newer business units promise plenty more growth, making Alphabet stock a smart buy.

When we ran the numbers, we arrived at a fair value of $124 per share, suggesting the share price could pop as much as 31% before risk of overvaluation is evident.

Amazon Stock vs. Alphabet: Which Is Best?

Amazon got its start in e-commerce and Alphabet was originally a search engine, but the two are now more similar than they are different. Both are expanding beyond those original businesses to shape the future of the digital world. Amazon is far ahead in the cloud computing space, though Alphabet has every intention of catching up. Meanwhile, Alphabet is a clear leader in digital advertising, but Amazon is hard at work on growing its own digital advertising business.

Both companies are deeply involved in smart home devices and the internet of things (IoT), and both are heavily invested in growing the capabilities of Artificial Intelligence. Either stock is a good addition to any portfolio, as both are likely to increase in value over time. However, in a choice between Amazon Stock vs. Alphabet, Amazon has a slight edge.

Amazon has more opportunity for expanding its core e-commerce business as emerging economies continue to gain internet and smartphone access. Its advanced logistics system opens opportunities to take on merchant partners, and Amazon Prime is an unbeatable package of benefits – including streaming video.

On top of that, Amazon is already leading the way in cloud computing services, and it has the infrastructure and reach to expand its digital advertising business quickly. All of those factors suggest Amazon stock will generate higher returns for shareholders than Alphabet – and that the returns will come sooner than Alphabet’s.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.