, Inc. (AMZN) vs Alphabet Inc (GOOGL) – The Best 10-Year Bet

If there has been one investment theme in 2017, it would have to be the “Amazon effect.” 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., Inc. (AMZN) vs Alphabet Inc (GOOGL) - The Best 10-Year Bet

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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.

Winner: Amazon


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.

Winner: Alphabet


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.

Winner: Alphabet


Here’s the fun part. Growth investing is always something of a guessing game about the future. When you buy a stock, you’re buying a future stream of cash flows. Valuing a stock becomes an exercise in estimating that future stream and then discounting it to the present, all of which depends on our best guess of what the future will look like.

Alphabet is still essentially a one-trick horse. Google accounts for 99% of the company’s revenue, with the vast majority of this being advertising dollars. For all of Alphabet’s projects, including self-driving cars, nothing but the search engine makes much money.

I’ve argued for a while that GOOGL has a hard-to-quantify disruption risk. Right now, the entire web is essentially built around being optimized for Google search. At this point, I don’t know what would knock Google’s search engine off its pedestal. Facebook Inc (NASDAQ:FB) couldn’t do it, and Google survived the great migration of browsing activity to mobile with barely a scratch.

But just as GOOGL came out of nowhere to obliterate Yahoo, I’d argue that Google and its advertising model are more at risk of disruption than is generally appreciated.

AMZN stock, on the other hand, seems less at risk of disruption. Retail isn’t new or exciting; Amazon just does it better and cheaper. And Amazon’s side projects, such as its Amazon Web Services cloud business, seem to have a better track record of becoming real businesses.

Winner: Amazon

Bottom Line on AMZN and GOOGL Stock

So, Alphabet is cheaper and more profitable, but Amazon is growing faster and seems to have better and more disruption-proof prospects going forward. Which do you choose?

You probably can’t lose with either. But I’d go with AMZN stock over GOOGL stock. Yes, it’s expensive. But you’re getting what is arguably the most innovative company of the last 100 years, and that doesn’t come cheaply.

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital. As of this writing, he had no position in any security mentioned.

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