Better Artificial Intelligence (AI) Stock: Amazon vs. Alphabet

Written by Keithen Drury for The Motley Fool->

Both Amazon and Alphabet operate large cloud computing units, but their core businesses are quite different.

Both stocks trade at premium valuations.

Two of the big four artificial intelligence (AI) hyperscalers are Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). These two are major players, yet they are deploying different strategies in the AI race.

Which one of these two is the better buy? Let's take a look, as they appear to be two entirely different companies on the surface.

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Amazon is still mostly known as an e-commerce business, but I think investors should view it differently. It operates the largest cloud computing service in the world, Amazon Web Services (AWS), and it's a major part of the company. In fact, AWS generated 59% of Amazon's operating profit in Q1, despite accounting for only 21% of sales. That's because AWS' margins are far higher than the margins of Amazon's commerce segments. And with AWS growing at a 28% clip, the share of profits coming from it is likely to continue rising.

Alphabet is a large conglomerate, but the Google ecosystem still sits at the heart of the operation. The majority of its revenue comes from advertising, but it also has a cloud computing component.

Google Cloud is smaller than AWS, with revenue coming in at $20 billion during Q1 (versus AWS' $37.6 billion), but it's growing at a blazing fast 63% rate. However, Google Cloud doesn't give Alphabet quite the same profitability boost that AWS does for Amazon, as advertising is already a high-margin business. Still, it's a growing contributor to Alphabet's overall picture.

Both companies are spending hundreds of billions of dollars a year on data center capital expenditures because they see a major opportunity in the cloud computing market, so they're investing heavily to build out computing capacity to capture a piece of it. This is a smart strategy, although it may take a handful of years for them to see the payoffs from it. Still, I think investors should give them some leeway, as they understand what customers demand in computing resources.

One difference between AWS and Google Cloud is that AWS doesn't have a native generative AI model, whereas Alphabet does. With Alphabet, users can deploy Google's Gemini family of AI models. With Amazon, investors can use a variety of AI models. While other AI models can be deployed on Google Cloud, it seems like the logical choice to go with its native model if you're using its ecosystem already. I don't think this is a huge difference maker, but it is something investors should be aware of.

I don't see much separation between these two and how they run their businesses, so I'm scoring this category as a tie.

From a revenue growth standpoint, Alphabet grew at a 22% pace during Q1, while Amazon grew at a 17% pace. Each of them also saw their earnings per share skyrocket, with Alphabet's growth once again outpacing Amazon's.

AMZN Revenue (Quarterly YoY Growth) data by YCharts.

There isn't a ton of debate about which is the faster-growing company, and forward projections point to the gap between them persisting. Wall Street expects 21% revenue growth for Alphabet for the remainder of 2026, and 19% growth next year. Analysts expect 15% growth for Amazon in 2026, and 13% next year. Clearly, Alphabet takes the prize here.

The market regards both Amazon and Alphabet highly, so it shouldn't come as a surprise that neither stock is cheap. However, I don't think either one is overvalued, either.

AMZN PE Ratio (Forward) data by YCharts.

Still, Amazon is the more expensive stock on a forward price-to-earnings basis, and the difference likely stems from each company's core business. Amazon's e-commerce business is far more stable over the long term than Alphabet's advertising business, which can face severe slowdowns when recessions strike (or even are just feared). However, with Alphabet's faster growth rate and cheaper stock price, I think it's the better buy now. That doesn't mean I think investors who own Amazon shares should sell them. I do still think Amazon is a worthy investment; it's just not as attractive to buy right now as Alphabet.

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Keithen Drury has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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