How effectively can Alphabet and Amazon grow beyond their core businesses? Based on both companies’ latest quarterly earnings announced October 25, Amazon has a stronger story to tell for now.
Amazon Grows Beyond Its Retail Base
Amazon reported strong quarterly growth in businesses beyond its legacy retail operation. Its Amazon Web Services cloud business achieved $6.7 billion in revenue, matching analysts’ earnings estimates. Its advertising business jumped 123 percent although off a small base ($2.5 billion). These numbers are important because services such as advertising and cloud computing are more profitable than the business most people associate with Amazon: retail. Overall, Amazon’s quarterly revenue growth was below analysts’ expectations. In CBNC’s view, the numbers suggest Amazon’s revenue growth may be slowing. But its profit margins beat analysts’ expectations, which makes the growth of its newer services such as cloud computing and advertising so important. As CNBC reported, “The widening profits are largely driven by the growth of Amazon’s high-margin businesses, including its cloud, advertising and third-party seller services.”
Alphabet Keeps Making Ad Dollars
Alphabet famously invests in a wide range of innovative businesses such as self-driving car company Waymo. But its quarterly earnings suggest that Alphabet’s real growth continues to come from its traditional cash cow, advertising. Google’s advertising revenues accounted for 86 percent of the quarterly company’s revenues, growing at 20.3 percent year-over-year. But its non-advertising revenue growth slowed. Per CNBC,
Meanwhile, its “other revenues” category, which includes its cloud business and hardware sales and is especially important to investors looking for Google’s future beyond ads, hit $4.64 billion, up 29.24 percent year-over-year. That’s a less dramatic acceleration than last quarter’s 36.53 percent increase.
Like Amazon, Alphabet beat earnings expectations but missed on revenues. Alphabet’s operation expenses – attributed mostly by R&D — were $11.1 billion, up 26 percent year-over-year. Unlike Amazon, which is showing an ability to grow beyond its retail roots, the narrative about Alphabet stubbornly focuses on advertising.
The irony is that advertising, Alphabet’s mainstay, is an important part of Amazon’s future. According to eMarketer, Amazon is now the third largest digital ad platform, behind Google and Facebook. Granted, Amazon ranks a distant third, but the company has demonstrated a remarkable ability to package and sell new solutions, and advertising is no exception, as we saw with the recent launch of Amazon Advertising, which offers products ranging from display to video ads.
More and more advertisers are indeed moving their budgets to Amazon – so we should not be surprised to see Amazon and Google emerging as ad rivals. Amazon already reportedly scaled back its own presence as an advertiser on Google. And Google launched its own marketplace backed by Costco, Home Depot, Target, and Walmart, a move seen as a dig against Amazon.
Both Amazon and Alphabet will bounce back from the disappointment of not meeting analysts’ expectations although given market volatility of late, choppy waters may await both in the near term. Over the long term, they’ll both attempt to continue to diversify – which will create a bigger rift. Advertising isn’t the only area where they compete. Google’s own cloud service competes with Amazon, although Google’s own market share is reportedly a distant third behind Amazon and Microsoft.
Alphabet has the upper hand with advertising – but Amazon is coming on strong. Amazon has the lead with cloud computing – and will probably widen its lead. The rivalry will ultimately be good for both businesses’ customers, who will benefit from stronger choice and more innovation that comes from competition among the tech titans.