Which is the Better Investment, Amazon or Google?
That’s the question Bloomberg Businessweek asked on Friday:
Conventional wisdom suggests Google, which turns huge profits, enjoys better gross margins, and has a far lower price-to-earnings ratio. Yet Amazon’s stock has returned 62.6 percent in the past year, compared with 9.6 percent for Google.
That’s a phenomenon Steve Hanke, an economics professor at Johns Hopkins University, and Ryan Guttridge, a fellow there, have named the “Amazon Puzzle,” and one they say they’ve figured out. The key is hidden in asset turns, or how effective companies are at getting revenue out of their investments. Asset turnover is defined as sales divided by total assets; the higher the number, the better.
Hanke and Guttridge worked out that Amazon was the better investment because it was better at turning over its assets, or generating revenue out of its investments.
That’s a good argument, but I have a simpler one.
Amazon’s the better investment because it has better long term growth prospects due to the fact that its interests align with both its users and its customers.
Amazon makes most of its money from retailing, so its users are its customers. Amazon wants to make its users/customers happy so they buy more, and that’s a lot easier to pull off than the delicate balancing act Google has to manage.
Google’s users are not its customers. Google derives much of its revenues from advertising, which means it captures the attention of users and sells that attention to Google’s customers, the advertisers.
That is a delicate balancing act because any steps Google takes to make its customers happy (ie more adverts or attention-getting adverts) will make its users unhappy.
And as we all know from the ongoing ad blocking brouhaha, users will only tolerate so many annoying ads before they decide to block said adverts. And to make matters worse, the users' attention span can only notice so many adverts on a page before the users start to tune them out. (And if there’s a problem worse than users refusing to view the ads, it’s when users don’t even notice the ads.)
Furthermore, Google is limited in the amount of advertising it can sell. It can only sell as much of your attention to advertisers as it can capture, while Amazon can sell you as much stuff as you are willing (or able) to pay for.
Yes, Amazon is the better investment.
Or am I wrong?
image by dullhunk
David September 28, 2015 um 7:43 pm
Yes, of course you’re wrong. For too long Amazon has been run without any real concern to a return on shareholder investment. It’s been more about trying to destroy the competition than run a profitable business. Both Google and Amazon are over-valued and while I wouldn’t recommend selling at this moment, I also would not encourage anyone to purchase.
Paul September 28, 2015 um 8:49 pm
I concur that Amazon is over-valued, but as a sustainable business, its not when you consider the success of some of its sub operations like Amazon Cloud, which is significantly profitable.
Plus you’re assuming the stock market rewards profits. It doesn’t. It rewards market dominance instead.
A more interesting question is who is more valuable in the long run, Google, or Facebook?
David September 28, 2015 um 10:11 pm
It should not be an absurd proposition that the better investment is not the company that operates at a consistent loss, can’t substantially differentiate itself, and is operated by megalomaniac who thought people wanted a six pack of disposable tablets, a phone with an array of cameras to fake 3-D depth, and I was going to suggest only makes money when they sell other people’s products. But that could also be said about advertising.
Google is the better investment because they own the tech, they invented the tech, and have amassed a giant pool of talent. Amazon is a poor investment because the market has allowed them to operate without reason for too long.
One cannot assume that Amazon’s cloud services will remain significantly profitable; the new storage offerings from Backblaze will help depress prices in the segment and decrease profits from S3 and so forth.
Syn September 29, 2015 um 12:20 am
I thought amazon reinvests its profits back into the business.
David September 29, 2015 um 1:10 am
There is a big difference between "reinvesting your profits in your business" and making insufficient revenue to actually make a profit. When a company says they are reinvesting the profits, that’s normally a blanket excuse used to avoid paying a dividend to their shareholders.
In Amazon’s case, they are actively wasting money by offering products and programs at a loss just to try and sabotage their competition.