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During the last years, Amazon (NASDAQ: AMZN) and Google, a subsidiary of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), began to look more and more similar. The two companies compete in the cloud computing markets, smart speakers and digital advertising. In fact, former Alphabet executive president, Eric Schmidt, was calling Amazon's biggest competitor Google as early as 2014.
Investors interested in the two higher-cap stocks could very well use them. Personally, I own shares of both companies, but if you do not want to do anything, which should it be, Amazon or Alphabet?
Source of the image: Amazon.com.
Amazon has huge competitive advantages
The biggest advantage of Amazon over other retailers is its huge distribution network. The company has been building for 20 years a network of warehouses and distribution centers designed to route parcels to customers' doors as quickly as possible. Physical competitors may have logistics networks focused on delivering items to their stores, but they are still catching up with regard to shipping individual orders to individuals' homes.
Amazon's distribution network allows it to process orders faster and cheaper than the competition. Amazon has passed on these savings to its customers, but its biggest success has been its Premium membership, which allows members to pay in advance for unlimited delivery within 2 days. Amazon currently charges $ 119 a year for Prime in the United States, and has more than 100 million Prime members around the world.
Prime creates a network effect for the Amazon Marketplace. One hundred million members make Amazon their first stop for online product searches. Last year, Amazon accounted for nearly half of all online product searches, surpassing Google and other search engines.
This type of traffic is extremely attractive to third-party merchants. It's not surprising that third-party merchant service sales have grown significantly faster than Amazon's retail sales in recent years. The growth in the number of third-party merchants on Amazon makes its product selection superior to almost all other sites, reinforcing the behavior of consumers who are starting to search for their products online at Amazon.com.
Finally, Amazon Web Services, the Amazon cloud computing industry, benefits from a massive scale. If we exclude software sales as services (such as Google's G Suite), Amazon holds about half of the cloud computing market. This scale allows it to maintain competitive prices, invest in new products (it offers more services than anyone in the industry) and to generate strong profit margins.
Source of the image: Google.
Google is a data monster
Google has considerable competitive advantages.
Its world-class Internet search engine attracts virtually every Internet search on the planet outside of China. This search engine relies on proprietary algorithms and on artificial intelligence (AI).
Google has an even greater advantage in mobile search, as it leverages the popularity of its Android operating system and pays a fee to other mobile browsers for Google to become their driving force. default search. Google accounted for over 92% of Internet searches in September.
The omnipresence of Google's search engine has also helped to create other popular products. The company has eight products with more than one billion users: Search, Android, Google Play, Gmail, Google Maps, Chrome, YouTube and Drive.
This type of scale offers significant benefits. For Android and Google Play, it attracts developers to respective platforms, creating a larger market for apps and games and generating more opportunities for Google to make sales.
For YouTube, this attracts content creators, and a growing amount of fresh, original content encourages the public to come back. The company used the YouTube audience as a launching pad for several premium subscription products, including YouTube TV and YouTube Music.
A diverse user base in which most users use multiple products allows Google to collect highly personalized data. In addition, the company's user engagement provides Google with multiple opportunities for targeted advertising. On the other side of the network, Google has built a massive base of advertisers. Many advertisers can get great results from Google because it is able to display ads to the right person at the right time and in the right context. Few competitors can offer this service.
Great growth prospects for both
Amazon and Google are both leaders in markets with excellent growth.
Global e-commerce sales will more than double between 2017 and 2021, according to eMarketer estimates. Amazon is poised to capture a significant portion of this growth thanks to Prime's popularity.
Similarly, digital advertising will grow at a similar pace over the next five years, according to data compiled by Statista. Google's ability to generate a higher return on investment for marketers compared to smaller competitors could also enable it to generate continuous market share gains over this period. But it's interesting that Amazon poses a challenge to Google's dominance.
At the same time, public cloud services are growing just as fast and will almost double between 2017 and 2021, according to data from Gartner. Google has taken shares in the sector, but Amazon is maintaining despite its already massive market share.
The competitive advantages of each company and the fast-growing industries in which they operate make the two companies' stocks extremely attractive to growing investors.
Evaluation
A discussion of the assessment is needed for a full side-by-side comparison of both actions. Let's take a look.
|
Metric |
Amazon |
Alphabet (C actions) |
|---|---|---|
|
P / E |
141.5 |
47.9 |
|
Forward P / E |
101.7 |
23.7 |
|
P / FCF |
100.5 |
39.4 |
Data source: YCharts. P / E = Prize to winnings. P / FCF = Free cash flow price.
The alphabet is much cheaper from the point of view of evaluation. This may be the case indefinitely while the CEO of Amazon, Jeff Bezos, strives to continue to invest as much as possible in the business to continue to grow. Investors interested in Amazon are paying a premium for their growth and have Jeff Bezos as CEO, who has proven that he is constantly developing new lucrative businesses at Amazon.
Alphabet shares are by no means cheap compared to other Internet service companies. The price of the company is considerably higher than Facebookfor example, on the three metrics. But the premium paid is minimal compared to the difference between Alphabet and Amazon.
Both companies have strong growth prospects and enough competitive advantages to take advantage of the secular growth of their respective sectors. If the valuation concerns you, buy Alphabet stock, but if you're more optimistic about e-commerce and cloud computing, Amazon might suit you better.
John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, is a board member of The Motley Fool. Suzanne Frey, a senior member of Alphabet, is a director of The Motley Fool. Adam Levy holds shares in Alphabet (C shares) and Amazon. Motley Fool owns shares and recommends Alphabet (A Shares), Alphabet (C Shares) and Amazon. The Motley Fool recommends Gartner. Motley Fool has a disclosure policy.
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