Better Cloud Infrastructure Play: Alphabet vs. CoreWeave

In the cloud computing world, there are several major players. They range from tech titans like Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) to upstarts like CoreWeave (NASDAQ: CRWV). There are also different focuses, with Alphabet having an AI computing segment but also offering broad cloud computing services, while CoreWeave is completely focused on AI.

But which company is the better investment in this space?

Image source: Getty Images.

Alphabet has a more diversified business

For CoreWeave, it's AI cloud computing relevancy or bust. The neocloud company must build out its data center footprint on a wide scale and then become profitable. Neither are easy tasks, and it may not succeed in the end. Furthermore, a large chunk of CoreWeave's business comes from just two customers right now: Microsoft and Meta Platforms. Each of these companies has its own cloud infrastructure and is a CoreWeave client to obtain more computing power faster and to reduce the number of data centers they have to build themselves. If either of those megacaps terminates its contract with CoreWeave, it would be in a world of hurt.

Alphabet is a far more conservative pick. While cloud computing is an important and growing part of its business, it only made up $20 billion of Alphabet's $90 billion in Q1 revenue. Alphabet also has a far more diversified customer base in its cloud computing business unit, with no single customer accounting for a majority of revenue. Additionally, Alphabet has other profitable business units such as Google Search and YouTube generating the cash flow to fund its data center build-out.

This makes Alphabet stock the safer choice, and the majority of investors are likely to prefer its stability.

Winner: Alphabet

CoreWeave's growth is better

Unsurprisingly, CoreWeave is growing more quickly than Alphabet's Google Cloud segment, but not by as much as you'd expect. In Q1, CoreWeave's revenue increased by 112% year over year to $2.1 billion. That's about a tenth of Alphabet's Google Cloud revenues for the period, but with a backlog of nearly $100 billion, CoreWeave has a lot of room to grow.

Google Cloud grew at a 63% pace during Q1, and has a backlog of about $462 billion. But for Alphabet as a whole, the top-line growth rate was just 22% -- though that's still impressive for a megacap. With major growth ahead for both companies, the future is bright for each. However, CoreWeave should be able to continue growing faster than Alphabet due to its smaller size, giving it the win here.

Winner: CoreWeave

CoreWeave's and Alphabet's valuations are hard to compare

Because CoreWeave is spending every dollar it can get its hands on to build out its cloud computing empire, it should come as no surprise that it is unprofitable. As a result, the best metric available for valuing the stock is the price-to-sales ratio. Trading at less than 9 times sales, CoreWeave's stock isn't that expensive for the industry it's in.

CRWV PS Ratio data by YCharts.

However, it has a long way to go before it could start turning consistent profits, and this valuation reflects that. Interestingly, Alphabet's P/S of 10 is only marginally higher, but for profitable companies, it's better to use a P/E ratio.

And by that metric, Alphabet is more expensive than it has been at most times over the past year.

GOOG PE Ratio data by YCharts.

While that P/E ratio of almost 27 doesn't disqualify it from consideration as a stock buy now, it does raise some valuation concerns.

Declaring a winner on this front is tricky because CoreWeave's stock seems priced correctly, but with no profits, it's harder to derive a meaningful valuation. Alphabet's stock may be more expensive than it has often been recently, but it's still appropriate compared to its big tech peers. I'm therefore inclined to call this category a tie.

Winner: Tie

Your preferred pick will depend on your investing style

If you favor investing in steady, solid growers with good upside, then Alphabet is probably the better stock for you, but you can be sure that it won't double in a year. If you want greater upside potential and are willing to risk more to get it, then CoreWeave is probably your better option. Each of these stocks could make for a solid AI investment, and if everything pans out, both will provide solid gains for investors.

Keithen Drury has positions in Alphabet, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.