Key Takeaways
- Price-to-earnings (P/E) ratios are an increasingly unreliable metric for valuing complex technology behemoths like Alphabet and Amazon, as they are distorted by accounting conventions and strategic reinvestment.
- A more insightful valuation approach considers metrics like free cash flow (FCF) yield and enterprise value to EBITDA, which better reflect underlying economic reality and capital allocation strategies.
- The market is not necessarily mispricing these companies; rather, current valuations reflect a sophisticated trade-off between their dominant positions and significant, non-trivial risks, including AI disruption for Google’s Search and margin compression for Amazon’s AWS.
- Sophisticated investors analyse these firms as a sum-of-the-parts (SOTP), where the value of individual segments like AWS, YouTube, and Google Cloud are assessed independently, revealing a more nuanced picture than a single consolidated multiple.
In the perpetual debate over mega-cap technology valuations, a recurring assertion is that giants like Alphabet and Amazon are, by some measures, ‘cheap’. This view, however, often relies on a superficial reading of traditional earnings multiples. A more critical perspective, articulated by analyst Rose Celine, suggests the market is not so easily fooled; it is unlikely to be severely mispricing two of the most scrutinised companies on the planet. Instead, the argument goes, headline earnings figures are noisy, laden with accounting artefacts, and ultimately inadequate for capturing the true economic substance of these complex enterprises.
Deconstructing the Earnings Illusion
The notion that a simple price-to-earnings (P/E) ratio can encapsulate the value of Alphabet or Amazon is a significant oversimplification. For both firms, the net income figure reported on their financial statements is a poor proxy for operational performance, albeit for different reasons. Alphabet’s earnings are frequently skewed by the mark-to-market accounting of its substantial corporate equity portfolio. Unrealised gains or losses on these investments, which have little to do with the daily performance of Search or Cloud, introduce considerable volatility to the bottom line.
Amazon, on the other hand, has a long and storied history of prioritising growth and market share capture over reported profitability. The company aggressively reinvests its operating cash flow into ventures with long-term payoffs, from building out its logistics network to expanding its fleet of data centres for Amazon Web Services (AWS). These capital expenditures depress short-term GAAP earnings but are precisely what has built the company’s formidable competitive moats. Consequently, judging Amazon on its P/E ratio is to miss the fundamental logic of its business model; free cash flow is a far more telling indicator of its financial health and value creation.
A More Honest Approach to Valuation
To move beyond the limitations of P/E, a comparative analysis using a broader set of metrics is required. By examining metrics less susceptible to accounting choices, such as free cash flow (FCF) yield and enterprise value to EBITDA, a more nuanced picture emerges. The market is not just looking at one number, but a mosaic of data points that inform its pricing.
The table below provides a snapshot of key valuation metrics for Alphabet and Amazon against their primary cloud competitor, Microsoft, as of late 2024. This provides a more grounded context than simple P/E comparisons alone.
| Metric | Alphabet (GOOGL) | Amazon (AMZN) | Microsoft (MSFT) |
|---|---|---|---|
| Market Cap (USD Approx.) | $2.2 Trillion | $1.9 Trillion | $3.1 Trillion |
| Forward P/E Ratio | 22.1x | 35.8x | 31.0x |
| Price to Free Cash Flow (TTM) | 28.5x | 34.2x | 41.5x |
| Free Cash Flow Yield (TTM) | 3.5% | 2.9% | 2.4% |
Source: Data compiled from Yahoo Finance and company filings, figures are approximate as of Q3 2024.
From this perspective, Alphabet appears relatively inexpensive on a forward earnings basis. However, its free cash flow yield is not dramatically out of line with its peers, suggesting the market is perhaps more discerning than the P/E ratio alone would indicate. Amazon’s valuation appears rich across the board, but this premium reflects enduring investor confidence in the growth trajectory and profitability of AWS and its burgeoning advertising business, which together account for the lion’s share of its operating income.
The Market is Pricing in Structural Risk
The assertion that the market is efficient is not to say it is always correct, but rather that it is not blind to the obvious risks. The current valuations of both Alphabet and Amazon arguably reflect a fair price for a basket of incredible assets discounted by a set of considerable, long-term threats.
Alphabet’s AI Crossroads
For Alphabet, the primary risk is existential: the disruption of its Search monopoly by generative AI. While Google is a formidable player in AI research, the transition presents two dangers. Firstly, AI-powered search queries are estimated to be significantly more expensive to serve than traditional keyword searches, threatening the high-margin model of its core business. Secondly, new entrants and established competitors armed with sophisticated AI models could begin to erode Google’s dominant market share for the first time in two decades. This is not a distant threat, but a clear and present challenge that any rational valuation model must incorporate.
Amazon’s Two-Front Battle
Amazon faces its own pressures. Its cash-cow, AWS, is maturing. While still a market leader, its growth is slowing from the torrid pace of previous years, and it faces intense competition from Microsoft’s Azure and Google Cloud, which is compressing margins. At the same time, its e-commerce business is contending with rising labour and fulfilment costs, alongside renewed competition from international players like Shein and Temu. The days of unbridled, high-margin growth in its key segments may be moderating, a factor the market is likely pricing in.
Conclusion: A Fair Price for Complex Realities
The debate over whether Alphabet and Amazon are ‘cheap’ is ultimately a futile one. They are neither obvious bargains nor over-inflated bubbles. They are complex entities whose market prices reflect a delicate equilibrium between immense, cash-generative moats and profound structural uncertainties. The market appears to be paying a fair price for this reality.
Looking ahead, a speculative hypothesis is that the key valuation metric for these firms will evolve. We may see the market move towards an ‘AI-adjusted’ cash flow metric, where analysts explicitly apply a higher discount rate to legacy cash flows perceived to be at risk of technological disruption—such as Google’s traditional search advertising—while assigning a premium to businesses demonstrating clear, profitable AI monetisation. This would create a new valuation paradigm, driving a wedge between incumbents and innovators even within the rarefied air of mega-cap technology.
References
Cabot Wealth Management. (n.d.). AMZN Stock or GOOG Stock: Which Is the Better Buy? Retrieved from https://www.cabotwealth.com/daily/growth-stocks/amzn-stock-goog-stock-better-buy
Celine, R. [@realroseceline]. (2024, November 13). [Brief summary of claim that the market isn’t undervaluing GOOG and AMZN and that earnings are misleading].
Forbes. (2024, November 15). What’s Happening With Google Stock vs. Amazon? Retrieved from https://www.forbes.com/sites/greatspeculations/2024/11/15/google-stock-vs-amazon/
The Motley Fool. (n.d.). Is Alphabet the Best S&P 500 Stock to Buy for Value and Growth? Retrieved from https://www.fool.com/investing/2025/07/03/alphabet-sp-500-stock-buy-value-growth
Yahoo Finance. (n.d.). Amazon.com, Inc. (AMZN). Retrieved from https://finance.yahoo.com/quote/AMZN/
