Better Artificial Intelligence Stock: Alphabet vs. Amazon

Both companies are spending heavily on AI this year.

There are a lot of great artificial intelligence (AI) stocks. Despite a downturn in AI stocks in recent days, the build-out of AI clearly has a long runway that will benefit buy-and-hold investors.

Two of the best and biggest hyperscalers right now are Alphabet (GOOG +3.66%) (GOOGL +3.95%) and Amazon (AMZN +2.56%). Both companies have vaunted cloud computing divisions that are rapidly growing as companies look to develop, train, and run AI programs in cloud environments.

But which of these two massively successful companies is the better buy? Let’s look at both and choose the winner.

Image source: Getty Images.

The case for Amazon: E-commerce and cloud services

Amazon made its mark in e-commerce, going back to its days as an online bookseller. In 2000, the company opened Amazon Marketplace to allow third-party sellers to offer products on its e-commerce network — a move that helped Amazon expand to become the leading e-commerce company in the U.S.

Amazon’s revenue in the fourth quarter was $213.4 billion, up 13.6% from a year ago. More than $177 billion of that was from the company’s e-commerce division, with sales up 11.8% from last year. But that pales in comparison to Amazon Web Services (AWS), which saw revenue jump 23.6% to $35.5 billion. More importantly, AWS is a much more profitable segment, generating income of $12.4 billion versus operating income of $11.6 billion for the much larger e-commerce division.

Amazon Stock Quote

Today’s Change

(2.56%) $5.25

Current Price

$210.11

AWS is by far the most interesting part of Amazon’s business today, with new deals with OpenAI, Visa, Lyft, United Airlines, CrowdStrike, Salesforce, and more. That’s why Amazon is planning to spend $200 billion on AI infrastructure this year — a spending plan that is making some investors nervous, but should pay off in the long run.

Alphabet: Internet dominance coupled with cloud services

Alphabet has a lot of similarities to Amazon. While Amazon got its start in retail, Alphabet’s roots go back to its famous Google search engine and Chrome browser. Both products are best-in-class and dominate their markets, giving Alphabet unquestioned superiority in generating revenue from internet advertising.

And both companies have critically important cloud computing services. AWS is the leader of the pack with a 29% global market share, but Google Cloud has grown to third place, with 13% of the market.

Alphabet Stock Quote

Today’s Change

(3.95%) $11.96

Current Price

$314.81

But here’s where the companies differ. While Amazon’s legacy e-commerce division has relatively low profit margins, Alphabet is figuratively printing money with its web advertising businesses. In the fourth quarter, Alphabet reported $113.8 billion in revenue, with $95.8 billion from advertising on Google Search, YouTube, and the Google Network, as well as from subscriptions. Alphabet reported a hefty profit of $40.1 billion from all that work — by far exceeding the profit margin from Amazon’s retail business.

Then add Google Cloud to the mix. Google Cloud generated $17.6 billion in revenue in the fourth quarter, up 47% from a year ago. And its $5.3 billion in operating income means that Google Cloud’s profit margin is a healthy 30%.

Alphabet is the better stock

Alphabet is planning to spend heavily on AI infrastructure this year as well, projecting to spend up to $185 billion. Alphabet’s massive advantage in internet advertising means that even with that spending, it will still be free-cash-flow-positive, while Amazon projects to have negative $17 billion in FCF this year, according to Morgan Stanley.

Both companies are investing for the future, and I believe in their long-term growth stories. But Alphabet is a better business overall, which is why I give Alphabet stock the advantage here.

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