Is Amazon or Alphabet the Better Stock Split Investment?
Two companies that lead many aspects of our digital lives, Alphabet ( GOOGL -2.44% )( GOOG -2.33% ) and Amazon ( AMZN -2.46% ), plan to execute 20-for-1 stock splits this summer. With both companies trading for thousands of dollars per share at the time of this writing, the stock splits would drop each company’s stock under $160 at current share prices.
The impending stock splits give investors who can’t afford today’s lofty share prices an opportunity to own a piece of these tech titans. Investing in both Amazon and Alphabet is ideal, given the outsize impact, each possesses over our online activities.
But even with a lower stock price, not every investor can afford to buy shares in both. If a choice had to be made, which is the better investment? To get an answer, let’s dig into each company.
Image source: Getty Images.
Why Alphabet is compelling
Alphabet makes an attractive investment for several reasons. Many of the company’s products lead in market share. Alphabet’s Google is a market leader in internet search, and so are its Chrome browser and Gmail. The company’s Android mobile operating system possesses nearly a 70% share of the mobile market.
Alphabet’s digital dominance helped deliver a stellar performance last year. The company’s 2021 revenue of $257.6 billion was an impressive 41% increase over the prior year’s $182.5 billion. That growth enabled Alphabet to achieve a net income of $76 billion last year compared to $40.3 billion in 2020.
Alphabet generated 81% of its 2021 revenue from advertising, and a rising shift in advertiser spending from offline media channels to digital ones will drive Alphabet’s income growth for years. Digital media’s share of total advertising dollars was 63% in 2021, and estimates predict it will hit 72% by 2025, reaching $785.1 billion from last year’s $491.7 billion.
Even so, Alphabet is expanding beyond advertising, pursuing the red-hot cloud computing market through its Google Cloud service. Google Cloud generated $19.2 billion in 2021 revenue, an impressive 47% increase over 2020.
Google Cloud also benefits from industry growth. The cloud computing market is forecasted to expand from $706.6 billion last year to $1.3 trillion by 2025. And Google Cloud’s track record of growth shows it can successfully seize its share of the cloud computing industry.
The case for Amazon
Like Alphabet, Amazon offers many reasons to invest. The company’s market-leading e-commerce business is expected to capture 40% of the U.S. market this year, more than the next 14 biggest U.S. retailers combined.
Despite its market dominance, the massive revenue delivered by Amazon’s North American and international e-commerce businesses last year didn’t translate into as much profit as the company’s cloud computing division, Amazon Web Services (AWS).
| Division | 2021 Net Sales | 2021 Net Income/(Loss) |
|---|---|---|
| North America | $279.8 billion | $7.3 billion |
| International | $127.8 billion | ($924 million) |
| Amazon Web Services | $62.2 billion | $18.5 billion |
| Total | $469.8 billion | $24.9 billion |
Data source: Amazon. Chart by author.
It’s no wonder when Amazon founder Jeff Bezos stepped down as the CEO last year, the reins went to Andy Jassy, who headed AWS. And as its cloud computing business illustrates, Amazon is more than e-commerce.
The company developed cashier-less technology for brick-and-mortar stores and is licensing this tech to other businesses. Amazon invested in electric vehicle maker Rivian, which had its initial public offering (IPO) in November, adding an $11.8 billion pre-tax gain to Amazon’s Q4 net income.
Amazon even waded into digital advertising, and this segment is growing quickly. The company’s Q4 advertising revenue rose 32% year over year to $9.7 billion. In addition, Amazon’s share of the U.S. digital advertising market is expected to reach 13.3% this year, up from 7.8% just three years ago.
But while increased shipping and fulfillment costs caused the company to suffer a net loss in its international division, e-commerce will remain important to Amazon. This year, the e-commerce industry is expected to reach $5.5 trillion in sales, rising to $7.4 trillion by 2025.
Amazon or Alphabet: which is better?
Alphabet’s and Amazon’s leadership in the digital world, as well as their industry growth in online advertising and cloud computing, make both attractive investments. Choosing between these two tech goliaths is difficult.
But Amazon’s business expenses ate up 95% of its revenue last year compared to 69% for Alphabet.
| Company | 2021 Revenue | 2021 Operating Expenses |
|---|---|---|
| Alphabet | $257.6 billion | $178.9 billion |
| Amazon | $469.8 billion | $444.9 billion |
Data source: Alphabet and Amazon. Chart by author.
Higher costs are likely to impact Amazon’s profits again this year, given rising inflation and a more competitive market for U.S. workers, combined with Amazon employees in New York voting to form a union.
Also, Amazon’s CEO has had less than a year in the top spot. It’s too early to know whether Jassy can match Bezos’ success. Meanwhile, Alphabet has a seasoned leader in CEO Sundar Pichai, who has led the company since 2019 and its Google business since 2015.
Alphabet’s lower operating costs and veteran CEO tip the scales in Alphabet’s corner. When these tech companies execute stock splits this summer, Alphabet looks like the better investment choice.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.