If there has been one investment theme in 2017, it would have to be the “Amazon effect.” Amazon.com Inc.’s (NASDAQ:AMZN) relentless push forward really went into overdrive this year with its planned purchase of Whole Foods Markets, Inc. (NASDAQ:WFM), which gives the online giant a large brick-and-mortar presence. But the company continues to expand on all fronts with no end in sight.
Of course, Google parent Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is no growth slouch either. Despite being the second-largest company in the world by market cap, GOOGL stock continues to grow at a dizzying pace.
Last year, Alphabet grew its revenues by over 20%, which is no small feat given that the company finished 2015 with annual revenues of nearly $75 billion.
So, if you had to choose only one of these tech giants to hold for the next decade, which would it be? Let’s take a deeper look at each.
AMZN vs GOOGL: Which Stock Has More Long-Term Strength?
It’s hard to argue with the growth numbers for either company. Over the trailing 12 months, GOOGL has raked in $99 billion in revenues, which means the company has more than doubled its revenues in less than five years. That would be impressive for just about any company in the world … unless they happen to be AMZN. Amazon’s revenues over the trailing four quarters total to a staggering $143 billion, which is 133% growth in less than five years.
Both are very impressive here, but the numbers are pretty straightforward here.
For years, AMZN was snidely called the “river of no returns” by bears that were put off by the company’s focus on growth over profitability. And frankly, the bears had a point. Last year, Amazon’s net margins amounted to a whopping 1.7%, and that was the highest it has been since 2010.
Alphabet’s net margins are consistently over 20%. And by most other traditional profitability metrics (return on equity, return on assets, etc.) Alphabet utterly trounces Amazon.
Again, the numbers are pretty straight forward here. Sure, AMZN’s profitability is consistently lowered by its constant reinvestment. And retail companies generally have lower margins than software or technology companies. But no matter how you spin it, GOOGL is the far more profitable company.
Because Amazon’s net margins are so small, any valuation metric that uses earnings-per-share in the denominator is going to make Amazon look ridiculously expensive. For example, AMZN stock trades at a price-to-earnings ratio of a ridiculous 197. That makes Alphabet’s P/E ratio of 35 — which is high by traditional market standards — look like an absolute steal by comparison.
Looking at other metrics, the picture becomes more complicated. Amazon trades for 3.6 times sales, which is nearly half GOOGL stock’s price-to-sales ratio of 7. But the price-to-free-cash-flow ratio for AMZN stock is higher (53 vs 27).
Based on the raw numbers, I have to give the nod to Alphabet. Although Amazon is not as overpriced as its P/E ratio alone would suggest, Alphabet is consistently cheaper when taking into account most other valuation ratios.