Alphabet (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) are two of the mega-cap tech firms that have led the market for the last two years, delivering outsized returns as AI and cloud computing have driven their earnings progressively higher.
Today, let’s look at Alphabet and Amazon to determine which could be the better stock to own going forward.
Alphabet Is So Diversified It’s Likely To Win
Alphabet has been on a massive growth streak for many years, notching an impressive 19 quarters of revenue growth and 8 of earnings growth. The business is very profitable, boasting a trailing 12-month net margin of 30.9%, a return on invested capital of 33.9% and a return on equity of 35.2%.
Alphabet’s most recent quarter came as a bit of a surprise in that both revenues and earnings solidly beat consensus expectations.
Management reported revenues of $90.2 billion and earnings of $2.81 per share for the quarter. The rate of net income growth was particularly notable, with a 46% year-over-year surge to $34.5 billion. Alphabet also kept up its strong share buyback program and authorized another $70 billion of capital to repurchase its own shares.
Looking forward, the search firm still has considerable opportunities for additional growth from emerging technologies. Alphabet has already become a leading force in AI, integrating the technology into its search and cloud computing business segments. Management expects to invest another $75 billion in AI capabilities this year, putting Alphabet in a good position to retain its early AI lead.
It is even beginning to carve out a foothold in quantum computing, which could be the next major frontier of technological breakthroughs in the years to come. Although quantum computer development may not pay off for several more years, Alphabet has put itself at the forefront of research into the technology.
With many smaller startups surging on distant quantum hopes, Alphabet may be the large, dominant business that actually has the resources necessary to commercialize the technology.
Valuation-wise, Alphabet trades at surprisingly low multiples for a mega-cap tech firm with such large growth prospects in front of it. GOOG shares are priced at just 20.1 times earnings, 6.2 times sales and 29.7 times operating cash flow.
Perhaps the most appealing valuation metric, though, is its price-to-earnings-growth ratio of just 0.5 against expected 5-year growth. Despite its seemingly attractive valuation, analysts only expect Alphabet shares to rise by about 11% over the coming 12 months to a consensus price target of $199.63.
Amazon Still Growing Like a Weed
Amazon is best known for the gigantic eCommerce business that still accounts for a majority of its revenues. Similarly to Alphabet, Amazon is growing at a very respectable rate, delivering a 9% revenue increase to $155.7 billion in Q1. Earnings per share also rose sharply to $1.59 against $0.98 in the year-ago quarter.
Like Alphabet, Amazon has been a beneficiary of the AI boom. Amazon’s strategy in the AI space hinges on offering access to several large language models through its AWS cloud computing business.
This sets it apart from other tech businesses that are betting on the success of specific LLMs. AWS’ revenues are also growing at a considerably faster pace than those of Amazon as a whole, delivering a 17% year-over-year gain in Q1.
Amazon does trade at a P/E of 35.4, noticeably higher than Alphabet’s. In most other regards, however, their valuations don’t appear too dissimilar.
AMZN shares are priced at a very comparable 0.5 times expected 5-year growth, and its price-to-sales ratio is substantially lower at 3.6. In the coming 12 months, analysts likewise expect Amazon to roughly mirror expectations for Alphabet by rising about 10% to an average target of $239.22.
Both Businesses Face Major Risks in 2025
Interestingly, Alphabet and Amazon are each contending with one serious risk factor right now. In Alphabet’s case, the risk comes from ongoing antitrust litigation. Earlier this year, a judge ruled that Google acted as a monopoly in the online search market and that it had acted anti-competitively.
Alphabet is still appealing the ruling, but in the meantime it is also changing its compliance structure at a projected cost of $500 million over 10 years.
Though modest to a business as large as Alphabet, this setback and subsequent changes to the business if the court’s decision is upheld could introduce more uncertainty than GOOG shareholders have historically had to deal with.
Amazon, meanwhile, has to deal with ongoing uncertainty around tariffs and trade. About 70% of the products sold on Amazon’s platform are made in China, exposing its marketplace to substantial risks associated with rising prices and supply chain disruption if the United States and China fail to reach a suitable trade agreement.
Is Alphabet or Amazon the Better Buy?
Alphabet is trading at a lower earnings multiple and is substantially more profitable with higher gross margins than Amazon.
So when comparing Alphabet and Amazon, it’s useful to acknowledge at the outset that both still appear to be exceptional companies that could still have many years of growth left in them, even with the risks outlined above.
However, Alphabet appears to have the edge in two important regards. To begin with, its lower P/E likely gives it a slight advantage where valuation is concerned. Even though analysts see similar near-term returns from the two stocks, investors who pay less for Alphabet today may see better long-term returns as the business grows.
Alphabet also enjoys significantly higher profitability than Amazon. Whereas Alphabet’s net margin, ROIC and ROE all exceed 30%, Amazon’s respective profitability metrics are 10.1%, 20.9% and 25.3%. Even with high-margin AWS revenue growing quickly, Amazon’s profitability could be somewhat held back by the risks facing its eCommerce business.
Put together, this means that investors today can pay a lower price for a business that is already more profitable. It’s also worth noting that GOOG shares could surge if Google wins its appeal against the DOJ’s antitrust suit. So, while Alphabet looks a bit riskier today than it has at most points in its history, its continued dominance in the search market, opportunities in emerging technologies and reasonable valuation may make it the better stock to own today.
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.