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Amazon.com, Inc. v. Google – The Motley Fool



In recent years Amazon (NASDAQ: AMZN) and Google, a subsidiary of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) have always looked more similar. The two compete in the cloud computing, smart speaker and digital advertising markets. In fact, former CEO of Alphabet, Eric Schmidt, already referred Google to Google in 2014 as the largest competitor.

Investors interested in the two mega-cap stocks could be successful with both. Personally, I own a stake in both companies, but if you only bet on one share, what should it be, Amazon or Alphabet?

  An Amazon brand cargo truck.

Image source: Amazon.com.

Amazon has some massive competitive advantages

Amazon's biggest advantage over other retailers is its vast distribution network. The company has built a network of warehouses and fulfillment centers for 20 years to deliver the packages to customers as quickly as possible. For stationary competitors, logistics networks may be geared toward delivering items to their stores, but they are still catching up when it comes to sending individual orders to households.

Amazon's distribution network makes it quicker and cheaper to order than its competitors. Amazon passes these savings on to customers, but the biggest coup was Prime membership, where members can pay for an unlimited 2-day delivery. Amazon currently prizes Prime in the US $ 119 a year and more than 100 million prime members worldwide.

Prime creates a network effect for the Amazon marketplace. One hundred million members make Amazon the first point of contact for online product search. Last year, Amazon accounted for nearly half of all online product searches and beat Google and other search engines.

This type of traffic is extremely attractive to third parties. It comes as no surprise that third-party revenue has grown significantly faster than Amazon's in recent years. Third-party growth on Amazon makes the product selection of almost every other website superior and strengthens consumer behavior to begin their online product search on Amazon.com.

Amazon Web Services, Amazon's cloud computing business, benefits from massive scale. With no software as a service sales (like Google's G Suite), Amazon owns about half of the total cloud computing market. This scaling makes it possible to maintain competitive prices, invest in new products (offering more services than any other in the industry), and achieve high profit margins.

  Google employees are in the form of the Google logo.

Google

Google is a data monster

Google has some massive competitive advantages

Its best-in-class Internet search engine attracts virtually every Internet search on the planet outside of China. This search engine is supported by proprietary algorithms and machine-learning Artificial Intelligence (AI).

Google has an even greater advantage in finding mobile devices because it benefits from the popularity of its Android operating system and pays other mobile browsers a fee to make Google their default search engine. Google accounted for more than 92% of Internet searches in September.

The omnipresence of the Google search engine has also helped develop other popular products. The company has eight products with more than one billion users: Search, Android, Google Play, Gmail, Google Maps, Chrome, YouTube and Google Drive.

This type of scaling offers significant benefits. For Android and Google Play, developers are moving to their respective platforms, creating a broader marketplace for apps and games, and generating more opportunities for Google to generate revenue.

YouTube is attracting content creators, and more and more fresh and original content keeps the audience back. The company used YouTube's audience as a starting point for several premium subscription products, including YouTube TV and YouTube Music.

A diverse user base, where most users use multiple products, allows Google to collect highly personalized data. In addition, the user interest of the company offers countless 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 they can show ads to the right person in the right context at the right time. Few competitors can offer this service.

Great growth prospects for both

Amazon and Google are both leaders in markets with excellent growth trends.

Global ecommerce sales will more than double between 2017 and 2021, according to eMarketer estimates. Amazon will make a significant contribution to this growth due to the popularity of Prime.

Digital advertising will also grow in the next five years, according to Statista data. Google's ability to provide marketers with a higher return on investment than smaller competitors could lead to further market share gains during this period. Interestingly, however, Amazon poses a challenge to Google's dominance.

The public cloud computing services are growing at the same speed, and will double by Gartner between 2017 and 2021. Google has been primarily involved in the industry, but Amazon holds its ground despite its already massive market share.

The competitive advantages of each company and the fast-growing industries in which they operate make the shares of both companies extremely attractive to growth investors.

Rating

For a complete comparison of the two stocks, a discussion of the rating is necessary. Let's take a quick look.

Metrics

Amazon

Alphabet (C-Shares)

P / E

141.5

47.9

Forward P / E

101.7

23.7

P / FCF

100.5

39.4

Data source: YCharts. P / E = price to profit. P / FCF = Free Cash Flow Price

Alphabet is much cheaper from a valuation point of view. This may be the case indefinitely as Amazon CEO Jeff Bezos continues to invest as much as possible in the business to grow. Investors interested in Amazon are paying a premium for growth, and Jeff Bezos as CEO, who has proven to be developing lucrative new business on Amazon.

Alphabet stocks are by no means cheap compared to other Internet service providers. For example, the company is significantly more expensive than Facebook for all three metrics. But the paid premium is minimal compared to the difference between Alphabet and Amazon.

Both companies have strong growth prospects and more than enough competitive advantage to benefit from secular growth in their respective industries. If the valuation concerns you, you buy alphabet stocks, but if you're more bullish on e-commerce and cloud computing, Amazon might suit you better.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fools Board of Directors. Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Adam Levy owns shares of Alphabet (C shares) and Amazon. The Motley Fool owns shares of and recommends Alphabet (A-shares), Alphabet (C-shares) and Amazon. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.


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