The financial battle of the tech giants.
How do the numbers for Amazon compare to those of Google?
Amazon versus Google is the story of shop versus search.
It is also the story of Amazon Echo versus Google Home, and the products and services
connected to them.
It is also the story of Amazon Prime Video versus YouTube.
How does the technology race between these and other tech giants impact the financial
scorecards for Amazon and Google (or “Alphabet Inc” as it is officially called)?
Let’s start with their position on the stock market, measured mid-March 2019.
Amazon’s share price is nearly 5x that of five years ago, Google’s has doubled over
the same timeframe.
In terms of total market capitalization, both firms are worth more than $800 billion each
(when multiplying the number of outstanding shares by the share price), and are among
the largest companies in the world.
In the income statements, we find that 2018 revenue for Amazon was $232.9 billion, and
2018 revenue for Google was $136.8 billion.
Compared to the prior year (2017), that’s a growth of 31% for Amazon and 23% for Google.
So in both absolute as well as growth terms, Amazon is bigger in revenue than Google in 2018.
When analyzing the story behind those numbers, we find out that the Amazon growth comparison
versus prior year is not fully apples-to-apples.
Whole Foods Market was acquired on August 28, 2017, so Amazon’s 2017 revenue included
only 4 months’ worth of Whole Foods Market revenue, while 2018 revenue had the full 12
months’ worth of Whole Foods Market revenue.
Organic revenue growth (excluding the effect of the acquisition) is therefore lower than
the 31%.
How much profit is generated from those revenues?
Let’s measure profitability on the Operating Income level.
$12.4 billion for Amazon, $26.3 billion for Google.
Those Operating Income numbers are bigger than what most companies generate in revenue!
On a relative basis, Amazon’s Operating Income as percentage of revenue is 5.3% versus
Google at 19.2%.
So in both absolute as well as relative terms, Google has a higher Operating Income than Amazon.
Google’s 2018 results were impacted by a $5.1 billion European Commission fine.
Excluding that fine, Operating Income would have been $31.4 billion.
The next financial statement to compare is the balance sheet.
What a company owns is on the left, what it owes is on the right.
Google’s balance sheet total is bigger than that of Amazon.
On the left hand side (assets), this is driven by Current Assets.
Let’s look at these in more detail.
For Amazon, Cash and cash equivalents of 31.7, Marketable securities 9.5, Inventories 17.2,
Accounts receivable and other current assets 16.7, to get to Total Current Assets of $75.1 billion.
For Google, Cash and cash equivalents of 16.7, Marketable securities 92.5, Accounts receivable
20.8, Other current assets 5.7, to get to Total Current Assets of $135.7 billion.
Clearly, the sum of cash, cash equivalents and marketable securities (in other words
“the investment portfolio”) is much higher at Google.
This is reflected as well on the right hand side of the balance sheet, in equity.
The book value of the equity for Amazon at the end of 2018 was $43.5 billion, that of
Google $177.6 billion.
Amazon’s equity balance included $19.6 billion of retained earnings.
Google’s equity balance included $134.9 billion of retained earnings.
Retained earnings is that part of a company’s cumulative historical profits that has not
been distributed to shareholders through a dividend.
Google’s “wealth” (from many years of profitability) is reflected on the left hand
side of the balance sheet in cash, cash equivalents and marketable securities, and on the right
hand side of the balance sheet in equity.
From the cash flow statement, we can calculate the 2018 free cash flow numbers for both companies.
Amazon generated Cash From Operating Activities of $30.7 billion, reinvested $11.3 billion
through purchases of property, plant and equipment (slightly higher than the 2017 CapEx spend),
and therefore had $19.4 billion in free cash flow at its disposal.
Google generated Cash From Operating Activities of $48 billion, reinvested $25.1 billion through
purchases of property, plant and equipment (almost double the 2017 CapEx spend), and
therefore had $22.9 billion in free cash flow at its disposal.
If you want to replicate this Amazon versus Google financial comparison when financial
results are released for future periods, or want to replicate the analysis for two completely
different companies, I would recommend first reviewing the market capitalization, then
revenue, operating income, the balance sheet totals and composition, and free cash flow.
This should provide a high level overview of how companies compare financially.
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