Amazon and Alphabet continue to be two of the largest companies globally, currently holding ranks as the fifth and fourth largest, respectively. Despite conventional wisdom suggesting that larger companies find it challenging to maintain rapid growth, both firms have managed to achieve respectable growth rates that often outpace the overall market.
As key players in the consumer market, both companies are significantly impacted by economic conditions. Amazon, which derives a substantial portion of its revenue from its commerce divisions, is vulnerable to fluctuations in consumer spending. In the second quarter, 60% of Amazon’s revenue came from North American operations, with an additional 22% sourced internationally. A downturn in the economy would likely lead to a decline in Amazon’s sales.
Similarly, Alphabet’s primary revenue stream is its advertising business, which generated $71.3 billion in sales during the same quarter, amounting to a total of $96.4 billion for Alphabet in Q2. Therefore, like Amazon, Alphabet is equally exposed to potential economic downturns.
Although both companies are poised for strong revenue growth during favorable economic conditions, their revenue streams may stagnate in tougher times. However, Amazon holds a distinct advantage with its cloud computing division, Amazon Web Services (AWS). Despite accounting for only 18% of Amazon’s revenue in Q2, AWS contributed over half of the company’s operating profits, which underscores its resilience during economic fluctuations. This segment operates under a subscription model, ensuring steady revenue as clients are inclined to maintain their services regardless of broader economic challenges.
Alphabet also has a cloud service, but its scale is significantly smaller than AWS. Additionally, Alphabet has a more favorable operating margin from its advertising side compared to Amazon’s commerce divisions, meaning Google Cloud’s impact on profit will never be comparable to that of AWS.
When comparing growth rates between the two companies, the competition is tight, with Alphabet showing a slight advantage in recent quarters. However, Amazon has been able to grow its operating profits at a faster pace. As Amazon’s high-margin sectors continue to expand, such as AWS and its advertising services, this trend is likely to persist.
From a valuation standpoint, Alphabet appears comparatively cheaper. Amazon’s price-to-earnings ratio may be skewed due to its extensive investment portfolio which affects its reported gains and losses. Using the price-to-operating profit ratio offers a clearer view, indicating Alphabet as a value choice, though the disparity has narrowed over the past six months.
Despite Alphabet being a strong investment option, Amazon’s combination of growth potential and resilience positions it slightly ahead, albeit by a narrow margin. Both companies remain attractive investments, but Amazon’s robust growth strategy, supported by its cloud computing leadership, gives it the edge.