Amazon's accelerating growth wins favour over Google's bigger bottom line

One problem the brilliant minds at Google have yet to solve: How to beat Amazon.com at its own game.

It isn’t for a lack of trying. Over the last couple of years, the internet search giant has aggressively built up its own cloud-computing business and pumped out its own line of smart speaker products—two relatively new businesses that have been wildly successful for Amazon. And that hasn’t been without some success on Google’s part. Its cloud-computing arm is now generating more than $1 billion in revenue every quarter. And its Home line of smart speakers now has about 31% of the US market, according to Consumer Intelligence Research Partners.
 

But investors are lukewarm on Google at best. Such was evident on Friday, when the shares of parent company Alphabet Inc. Google slid 5% in the wake of its fourth-quarter results, though that only wiped out gains made since the first of the year. By contrast, Amazon’s own results helped its stock defy the market’s brutal selloff to gain nearly 3% for the day—having already run up 17% for the year.
 

For Alphabet, the main issue for investors is the rising costs that Google has to pay partners to direct traffic to its sites. Those traffic acquisition costs totaled $21.6 billion in 2017—up 29% from the previous year. That outpaced the 20% revenue growth for Google’s core advertising business for the year, which weighs on the company’s profitability. Alphabet CFO Ruth Porat noted that the growth rate of these costs should start to moderate early this year.
 

But profitability isn’t why investors favor the retailer over the search engine. Google’s $26.1 billion of operating income last year is about 40% more than Amazon has earned in its entire existence. Nor is it the propensity to make big gambles.

The difference is that Amazon has figured out how to make more of its big gambles, such as Prime and its AWS cloud service, drive its accelerating growth. Since 2010, Amazon’s larger revenue base has averaged 28% growth annually while Alphabet’s has averaged 21%.
 

In textbook investing, profits matter over revenue growth, but that doesn’t always hold in tech. Investors won’t return to Google just because it is so profitable. Instead, the company can emphasize successful new businesses like the cloud and better articulate how its ubiquitous Android mobile operating system contributes to growth. If it can do that while keeping its wildly profitable core business clicking, Google can catch up to its rival.

Source: The Wall Street Journal