Are Amazon and Alphabet Among the Best Stocks to Buy Now?

Several big tech stocks look promising, especially after this cohort has sold off a bit over the past few weeks.

Two stocks that have sold off that some investors are considering are Alphabet (GOOG 0.56%) (GOOGL 0.42%) and Amazon (AMZN 0.87%). Alphabet is down around 10% from its all-time high, while Amazon is down around 16%.

That’s a decent discount on two companies often recognized as some of the more dominant businesses in the world, but are they solid buys now?

Image source: Getty Images.

Both companies are feeling huge demand in the cloud sector

Amazon and Alphabet are more similar than one may think. Each company operates a primary business, but also has a thriving cloud computing business on the side.

For Amazon, its commerce business is the most well-known part of its company. You’d be hard-pressed to find someone in the U.S. who hasn’t used Amazon’s services, and the Prime membership has become a staple in many households.

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NASDAQ: AMZN

Amazon

Today’s Change

(-0.87%) $-1.83

Current Price

$207.70

Key Data Points

Market Cap

$2.2T

Day’s Range

$206.23 - $210.56

52wk Range

$161.38 - $258.60

Volume

1.6M

Avg Vol

49M

Gross Margin

50.29%

Alphabet is the parent company of Google, and also has other properties like the Android operating system and YouTube, among many others. At the core of Alphabet’s business is its advertising, which has done quite well over the past year.

Despite both of these having household-name primary businesses, my top reason to invest in each of them is cloud computing, which isn’t nearly as popular as each stock’s core business.

Amazon Web Services (AWS) is actually a more critical part of Amazon’s whole business than one may think. During the fourth quarter, 50% of Amazon’s operating profits came from AWS. Q4 is known to be the most profitable quarter for retailers, and a less skewed quarter like Q3 saw AWS deliver 66% of Amazon’s operating profits.

Investors need to flip their minds on why Amazon’s stock is a buy, as AWS seems to be the main profit driver. It’s also a huge growth driver, as AWS was Amazon’s fastest-growing segment, rising at a 24% year over year pace in Q4. That’s the best quarter in more than three years, and it’s becoming clear that AI demand is starting to boost AWS’s growth rate.

Google Cloud is less critical than AWS, as it’s a part of a company that already has incredible operating margins. Still, the growth that Google Cloud is putting up is jaw-dropping. In Q4, Google Cloud delivered 48% year over year growth, and its operating margin was an impressive 30%. Google Cloud is a huge source of growth for Alphabet, and with more and more AI capacity coming online each quarter, don’t be surprised to see this incredible growth rate continue for years down the road.

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NASDAQ: GOOGL

Alphabet

Today’s Change

(-0.42%) $-1.28

Current Price

$302.27

Key Data Points

Market Cap

$3.7T

Day’s Range

$300.45 - $307.82

52wk Range

$140.53 - $349.00

Volume

995K

Avg Vol

33M

Gross Margin

59.68%

Dividend Yield

0.28%

Both companies have thriving cloud computing businesses that boost their base business, but are they buys now?

Amazon and Alphabet have a premium valuation

Both Amazon and Alphabet trade at similar valuations.

AMZN PE Ratio (Forward) data by YCharts

Currently, the **S&P 500 **(^GSPC 0.61%) trades for about 21.7 times forward earnings, making these two trade at a decent premium to that market. Additionally, peers like Microsoft and Nvidia trade at 24.2 and 22.6 times forward earnings, respectively. Nvidia is growing at a much faster pace than both of these two, and Microsoft has a thriving cloud computing business unit similar to both Alphabet and Amazon.

I think Microsoft and Nvidia are a bit more compelling investments right now, but that doesn’t mean you need to sell your Alphabet and Amazon shares. These two investments are panning out just as planned, but I think there are better values in the stock market right now.