Internet advertising has become a lucrative business that has boosted some of the biggest tech companies. ParentGoogle Alphabet (GOOGL -2.83%) (GOOG -2.77%) used ads to monetize their sites, and this strategy has been hugely successful.
Now, after seeing the success of Alphabet and parent Facebook Metaplatforms in the advertising space, Amazon (AMZN -2.99%) began monetizing its extensive web presence by selling advertisements. The question for investors is whether such a move makes Amazon a better advertising stock than Alphabet.
The case of Alphabet
Alphabet is one of the leading pioneers of Internet advertising. The company became the dominant search engine shortly after its founding in 1998. From 2000, it attached advertisements to its searches and its business was born. After buying YouTube, this site became another main platform for advertising.
This company was so profitable that it has since invested in dozens of other companies and owns nearly $140. billion of cash at the end of the first quarter of 2022. This gives it one of the strongest balance sheets of American companies.
Today, it has gradually diversified its revenue base away from advertising, increasingly emphasizing its Google Cloud offering. Still, advertising accounted for $55 billion of its $68 billion total revenue in the first quarter, or about 80%. This total turnover jumped 23% compared to the same quarter last year.
Granted, its first-quarter net profit fell 8% year-over-year due to losses in equity investments. Still, the company earned more than $16 billion in that quarter, which helped add more than $15 billion to its quarterly free cash flow.
Alphabet is not immune to Nasdaq bear market as the stock price fell 6% in the last 12 months. However, its P/E ratio of 22 is near a multi-year low, an indication that this lucrative ad game has turned into a good business.
Where is Amazon now?
Although most consumers consider Amazon to be one of the leading e-commerce companies, it pioneered the cloud through Amazon Web Services (AWS). AWS remains the top cloud computing company by market share according to Synergy Research Group, and the AWS segment has generally accounted for the majority of the company’s net income.
Additionally, while Alphabet is the advertising company increasingly moving to the cloud, Amazon is the cloud leader looking to fulfill its potential as an Internet advertiser. The company originally launched Amazon Advertising years ago to better monetize its sprawling web presence.
Amazon had not emphasized this segment in its earnings reports and did not release any advertising revenue figures until the fourth quarter of 2021. Nevertheless, in the first quarter, it recorded advertising revenues of almost 7 $.9 billion, an increase of 23% over the prior year quarter. In total, advertising accounted for about 7% of the company’s $116 billion net sales for the quarter.
Still, Amazon struggled with profitability as inflation hit its e-commerce segment. The company lost $3.8 billion in the first quarter, a sharp reversal from its net profit of $8.1 billion in the first quarter of 2021.
Additionally, Amazon’s stock price has fallen more than 35% year-over-year. And while its P/E ratio of 56 is just above multi-year lows, its earnings multiple far exceeds that of Alphabet. While these conditions aren’t necessarily a reason to go negative on Amazon, it remained a relatively expensive stock.
Alphabet or Amazon, which one to choose?
Despite efforts to diversify away from advertising, Alphabet appears to be a better choice for ad investors. Granted, both stocks dominate critical parts of the tech sector and should beat the market in the long run.
However, Alphabet maintained its positive net result in this environment. Moreover, advertisements remain the main driver of the company’s considerable cash flow. After adding Google’s parent company’s much lower valuation to the list of considerations, many potential Alphabet investors might decide to buy now and hold forever.
Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Will Healy has no position in the stocks mentioned. The Motley Fool holds positions and endorses Alphabet (A shares), Alphabet (C shares), Amazon and Meta Platforms, Inc. The Motley Fool has a disclosure policy.