Berkshire Hathaway's Greg Abel Dumps Amazon and Loads Up on Alphabet. Is It the Better Buy?
Key Points
Berkshire Hathaway tripled its position in Alphabet in the first quarter.
Alphabet is growing faster than Amazon in percentages, but Amazon is almost double its size.
They trade at a nearly identical P/E ratio.
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Berkshire Hathaway's new CEO, Greg Abel, made some major moves in his first quarter as the company's leader. He sold off a slew of small positions, including Amazon (NASDAQ: AMZN), concentrating the portfolio in 29 stocks, and he tripled the company's position in Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL).
Is Alphabet a better buy than Amazon today?
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Two tech titans
Amazon and Alphabet are two top tech stocks and two of the most valuable companies in the world. Alphabet, though, has skyrocketed over the past five years, and it has the second-highest market cap of any global company, with $4.4 trillion, while Amazon has underperformed the S&P 500.
GOOG Total Return Level data by YCharts
The companies have many similarities, starting with their varied revenue streams, something Warren Buffett says he looks for in a great company.
Amazon's core segments are e-commerce and cloud computing, but it also has a streaming service, healthcare products, and more.
Alphabet's core product is its search engine, but it also has a formidable cloud business in addition to YouTube, Android, and more.
Both of these companies are leagues ahead of any competition in their main businesses, with strong economic moats.
How do they compare?
Let's take a look at how they compare on recent metrics and valuation.
| Metric | Alphabet | Amazon |
|---|---|---|
| Sales growth | 22% | 17% |
| Operating income growth | 30% | 30% |
| Operating margin | 36% | 13.4% |
| P/E ratio | 27.6 | 28.4 |
Data sources: Amazon and Alphabet quarterly reports, yCharts. All growth is year over year.
From this simple comparison, Alphabet looks like the better buy. It's growing faster, and it's turning more dollars into profits.
But that's not the whole story. Amazon is much bigger than Alphabet; in fact, it's nearly double its size, with $743 billion in trailing-12-month revenue versus $423 billion for Alphabet. Therefore, its 17% growth is much more in absolute terms and a very impressive showing.
The operating margin is lower because Amazon deals with e-commerce and sells actual products, while Alphabet is mostly a services company. Wider margins are a good reason to own tech stocks, but it doesn't necessarily point to a better-run organization. Amazon Web Services (AWS) itself had a 38% operating margin, while Google Cloud's was 33%.
Image source: Alphabet.
Which is the better buy?
Personally, I find this a tough call, even though Abel clearly doesn't. These are both terrific powerhouses with tons of long-term opportunity.
Alphabet stock has been trading at a lower P/E ratio for most of the year, which might be why it looks like the better buy. It also has the top position in several industries, including an unparalleled lead in search at about 90%. Even Amazon doesn't have that in e-commerce. And while AWS is still the leader in cloud, Google Cloud is growing faster, at 63% in the first quarter versus 28% for AWS. While in absolute terms AWS brought more in, the growth potential is compelling.
Alphabet does look like the better buy today, although keep in mind that a $337 billion portfolio looks different than yours, and Amazon is still an excellent pick.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
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