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Amazon, Alphabet and Alibaba: picking a winner

Does one of these titans of tech shine brighter than the rest?
Amazon, Alphabet and Alibaba: picking a winner
  • Alibaba, Amazon and Alphabet have reported record revenues from respective results overnight 
  • Cloud revenues are playing an increasingly important role in all three companies numbers 
  • Regulatory issues are starting to damped optimisim

1994: Jeff Bezos founded an online book store in Seattle, hoping to benefit from the plethora of tech genius in the home of Microsoft. 

1996: Larry Page and Sergey Brin began a search engine research project from their dorm rooms in Stanford University, California.

1999: Jack Ma and his friends set up a business-to-business marketplace from his Hangzhou apartment. 

Of the thousands of dotcom pioneers to try their luck at starting an internet business in the 1990s, no one has had as big an impact on the world as the founders of Amazon (US: AMZN), Alphabet (US: GOOGL) or Alibaba (US: BABA). 

Now, with a combined market capitalisation of $3.8trn - $142bn higher following the response to last night’s earnings announcements - the way ahead for these three tech titans is converging. As e-commerce and advertising meet cloud computing and creeping regulation, which company’s future is the brightest? 


Riding the cloud

This week has been a big one for Amazon’s cloud computing division, Amazon Web Services (AWS). Its head Andy Jassy will be replacing Jeff Bezos as chief executive of the entire company, while the founder steps aside into an executive chairman role. Investors might well expect an even sharper focus on AWS, which has long been heralded as the real money-maker at Amazon. The arm, which made up just 12 per cent of the company’s net sales in 2020, accounted for 60 per cent of its operating income. 

The business was boosted by the digital transformation rush last year, although growth slowed in the last quarter, with sales up 25 per cent year-on-year to $12.7bn, compared with 29 per cent in the two preceding quarters. Meanwhile, its operating margin was slightly below consensus, but still at a healthy 29 per cent. 

Yet despite the cloud’s juicy business model, it is not the same cash machine at Google’s parent Alphabet. This week the company revealed the details about the costs of its cloud business for the first time: while it generated $3.8bn in revenue, overall it lost $1.2bn in the fourth quarter. A few years behind AWS, and without Microsoft’s (US:MSFT) extensive experience in corporate IT, cloud services have proved to be an expensive undertaking for the data giant. Its sales grew 47 per cent year on year, up from 45 per cent and 43 per cent in the last two quarters – but were still outpaced by 50 per cent growth at Microsoft’s cloud business Azure. 

Chinese tech giant Alibaba was able to match that figure, although at a smaller scale. Its cloud computing revenue also grew 50 per cent, reaching $2.5m – and turning a profit for the first time, with adjusted EBITA of $3m. 



This quarter has revealed some signs that the pandemic-induced rush to the cloud is starting to slow. But Amazon still retains its top status in the US, and while Microsoft is hot on its heels, Google has some catching up to do. It is unlikely that any of the players from Silicon Valley will be able to conquer the market in Asia – and certainly not in China – as well as Alibaba. But Amazon, soon to be steered by the AWS chief, will be difficult to knock from the top spot thanks to its first mover advantage and its decades of experience as the market leader. LA


E-commerce and advertising – bread and butter revenues

While Alibaba is expanding into other areas such as cloud computing and digital entertainment, the Chinese tech giant currently relies on its retail operations for almost 90 per cent of its total revenue. The group is predominantly focused on the domestic market through its Taobao and Tmall platforms, and generates most of its retail revenue through commissions and marketing services rather than direct sales. 

With Covid-19 accelerating the shift to online shopping, the group's commerce revenue surged by almost two-fifths year-on-year in the three months to 31 December, to RMB 196bn (£22bn). This was aided by its extended ‘Singles Day’ shopping event in November which saw the value of merchandise sold increase by more than a quarter versus the same period in 2019. 

Alibaba gained 22m annual active consumers across its Chinese marketplaces in the December quarter, bringing the total to 779m, and it is aiming for this to reach over 1bn by the end of 2024. The group is pushing into less developed areas of China – the so-called ‘lower tier’ cities – although its expansion plans could be hampered by rising competition from the likes of (US:JD) and fast-growing Pinduoduo (US:PDD).

Amazon has been a similar winner of the pandemic as consumers flock online. Following a “record-breaking holiday season” – in which it delivered more than 1.5bn toys, electronic items and home and personal care products worldwide – the group's quarterly net sales topped $100bn for the first time, following in the footsteps of Apple (US:AAPL). 

The e-commerce boom is also benefitting another area of Amazon’s business – digital advertising. As ad spending recovered across 2020, the group’s ‘Other’ segment – which primarily relates to advertising sales – saw revenue jump by two-thirds to just under $8bn. 

But internet advertising is still dominated by Google. Alphabet’s chief business officer, Philipp Schindler, notes that “advertisers responded to the shift in consumer behaviour by reactivating spend that they had paused earlier in the crisis” and this resurgence in spending, particularly by retailers, saw Alphabet’s ad revenue rise by more than a fifth year-on-year in the fourth quarter, to $46.2bn. This includes a $6.9bn contribution from YouTube – up almost 50 per cent from a year earlier – as companies chase an increasingly fragmented media audience. 


The pandemic bump won’t last forever, but Amazon’s long-term momentum should continue amid the ongoing structural shift to e-commerce. It faces less direct competition than Alibaba and its burgeoning advertising business shouldn’t be underestimated. Analysts at Needham reckon that the group is twice as successful at converting clicks into purchases compared to Google and believe that “ad revenue growth will be a powerful upside profit driver for Amazon in 2021.” NK


A sting in the story 

Should it be a surprise that Jeff Bezos has decided to take a more ceremonial role in his company? Perhaps not. Being the chief executive of Amazon right now means attending Senate hearings and being forced to answer tricky tax questions posed by European regulators. A desire to stay out of the regulatory spotlight might also have spurred Messrs Page and Brin to hand the reins of Alphabet to Sundar Pichai in late 2019. Monopolies are unpopular with politicians and the watchdogs are closing in. 

But despite the fact that Google has been sued by the Department of Justice, Federal Trade Commission and EU, while Amazon is regularly held up as the legal case study for corporate greed, regulators are not going to find it easy to stymie these giants' momentum - their reach is just too big. receives almost 200m visits per month, while an estimated 4bn people worldwide use Google. If antitrust regulation is intended to protect the consumer, it is going to be hard to make the case against either company.

Still, regulators are giving it a good shot and that is especially true in China where politicians can act quickly. In late December, the Chinese government opened an investigation into ‘alleged monopolistic practices’ at Alibaba - ironic given the rising competition right now - and the company has been forced to scale back operations of its fintech venture Ant Group, which was due to IPO last year. Jack Ma is increasingly finding himself on the wrong side of politicians. 

For Google, the pressure is perhaps greatest in Australia where the government is attempting to force the media company to take greater responsibility for content it publishes. Google has retaliated by threatening to pull its search engine; a risky game with Microsoft’s Bing waiting in the wings to pick up search traffic. 



For companies the size of these three giants, regulation isn’t much of an imminent threat. Alphabet has just reported record revenues of $183bn and net profits of more than $40bn (a 22 per cent margin); Amazon’s service sales are creeping closer to those generated by products and contributed 44 per cent of $386bn of revenue generated in 2020; Alibaba generated quarterly revenue of $33bn, up 37 per cent on the previous year. 

But if the regulators get their way, the company which derives its revenue from the biggest variety of sources is surely best placed to weather the storm. And for now at least, that company is Amazon. MB


Amazon emerges as our winner by a landslide, dominating in both cloud computing and e-commerce, as well as appearing the most safe from regulators, despite being the subject of the legal paper that has driven much of the antitrust movement on Capitol Hill. It is also, unsurprisingly, a market favourite and the most expensive FAANG stock, with a forward price-to-earnings ratio of 72 times, compared to Alphabet’s multiple of 30, and Alibaba’s 22. 

Amazon is perhaps the dream holding, but Alphabet and Alibaba would also be good strategic buys for investors who want to top up their portfolio with big tech. Funds that offer exposure to all three companies include the Allianz Technology Trust (ATT) and Polar Capital Technology Trust (PCT).