On the surface, the numbers look backwards. Amazon (AMZN -0.46%) trades at about 22 times earnings and about 30 times the earnings expected of it over the next year. Alphabet (GOOG -0.07%)(GOOGL -0.08%) trades at about 18 times earnings and about 27 times forward.
For both, next year costs more than last year. Ordinarily, that arithmetic means one thing — profits are expected to fall.
And these aren’t struggling businesses. So either the market expects earnings to decline at two of the largest companies on Earth, or the trailing numbers aren’t what they appear.
It’s mostly the second, though I’d stop short of calling either stock cheap once the reason is on the table.
Image source: The Motley Fool.
Amazon: the $53 billion quarter
Amazon earned $62.6 billion in the second quarter, up from $18.2 billion a year earlier. The release itself flags what happened, noting the quarter “includes non-operating pre-tax other income of $53.4 billion, primarily from our investments in Anthropic.”
That windfall is nearly double the operating income Amazon produced in the same three months. And it sits inside the year of earnings the 22-times multiple divides by. Take it out, and the stock stops looking cheap.
The operating business is a different story, and an impressive one. Operating income rose 43% year over year to $27.5 billion even as trailing-12-month free cash flow swung to a $7.6 billion outflow, on net purchases of property and equipment that ran $66.1 billion higher than the year before.
Today’s Change
(-0.46%) $-1.22
Current Price
$263.91
Key Data Points
Market Cap
Day’s Range
$263.61 – $265.81
52wk Range
$196.00 – $287.20
Volume
7.3M
Avg Vol
49.9M
Gross Margin
50.77%
Amazon Web Services (AWS) grew 37% to $42.2 billion, its fastest pace in 18 quarters.
The spending is the forward story. Amazon lifted this year’s capital spending plan to about $220 billion, citing rising memory costs. Depreciation from a buildout that size lands in the income statement for years afterward, which is likely a big part of why next year’s expected earnings sit below the trailing figure.
Alphabet: the $98 billion mark-up
Alphabet’s version is bigger. Second-quarter net income rose 298% to $112.2 billion, and the company attributed the surge to other income of $98.0 billion, “primarily the result of net unrealized gains on our equity securities.”
Those securities include stakes in SpaceX and Anthropic. Unrealized is the important word — the gain is a mark-up on paper, not cash arriving. Of course, the same line would swing the other way if those valuations fell.
Beneath the mark-up, the operating engine looks a lot like Amazon’s. Revenue rose 24% to $119.8 billion, operating income climbed 30% to $40.8 billion, and Google Cloud’s revenue accelerated to 82% growth.
Today’s Change
(-0.08%) $-0.29
Current Price
$346.08
Key Data Points
Market Cap
Day’s Range
$345.58 – $350.45
52wk Range
$196.59 – $408.61
Volume
4.5M
Avg Vol
32.7M
Gross Margin
60.94%
Dividend Yield
0.25%
The forward drag is the same, too. Capital spending doubled year over year to $44.9 billion in the quarter, and Alphabet raised its full-year plan to as much as $205 billion.
The depreciation is already arriving. It ran $7.1 billion in the second quarter, up about 42% from a year earlier, and free cash flow for the period was negative $5.9 billion.
The multiple that matters
The estimates under those forward multiples imply Amazon earning about $9 per share over the next year against the $12.44 it earned over the past 12 months, and Alphabet about $13 against $19.93. Read as forecasts of the businesses, those could pass for collapses. They’re mostly subtractions — the windfalls coming back out.
In other words, the market isn’t forecasting decline at either business. The multiples on next year’s earnings sit above the ones on last year’s because last year’s rest on windfalls that won’t repeat on any schedule. On next year’s earnings, the base without the paper gains, both companies cost about 27 to 30 times.
A caveat on those forward figures. They’re built on consensus earnings estimates, and I wouldn’t hang a verdict on analysts’ math. The companies’ own disclosures point the same way, though: both are guiding capital spending near or above $200 billion this year, and depreciation from those budgets reaches income statements on multi-year schedules.
Which one wears the price better? I’d give the edge to Alphabet. It’s the cheaper of the two on both bases, its operating margin expanded to 34% even while the spending doubled, and its cloud business is accelerating.
Sure, Amazon’s business is running faster right now. Operating income rose 43% against Alphabet’s 30%, and AWS is the bigger cloud by far. But at about 27 times forward earnings against about 30, Alphabet is arguably the better value of the two.
Neither is the bargain the multiple on last year’s earnings advertises. Much of the number underneath it is mostly a mark-up on paper.
