Pick Google over Amazon, this portfolio manager says

Portfolio manager David Burrows definitely has his partialities within the tech sector, and while he thinks investors will probably do well owning Amazon (Amazon Stock Quote, Charts, News, Analysts, Financials NASDAQ:AMZN) over the long run, it’s the strength in recent quarters shown by Google (Alphabet Stock Quote, Charts, News, Analysts, Financials NASDAQ:GOOGL) that should be attracting your attention.

“First of all, it’s very hard to suggest fading Amazon — it is such a behemoth,” said Burrows, president and chief investment strategist at Barometer Capital Management, speaking on BNN Bloomberg on Thursday.

“And whether or not the stock got ahead of itself, it will grow into its share price. But it has been consolidating, so before I added to it I would want to see it start to catch a little bit more of a bid,” he said. “The whole internet retail space has been consolidating and relatively underperforming right now. We’re a little bit short of Internet retail as a firm right now.”

It looked like Amazon was ready to break out of year-long funk when the stock started to take off in mid-June, potentially ending a significant stretch without much change in share price with the stock stuck around the $3,000 – $3,400 range. Granted, that was still heady territory for a company that went from $2,000 to $3,000 in short order over the early months of the pandemic last year. But roughly between last June and this June, not much was happening for the e-commerce king.

Then came a stretch in early July where AMZN looked to be headed above $3,500 for good, rising to as high as $3,731 by July 8. But a disappointing quarterly report on July 29 has knocked the stock once again below $3,400, with even sub-$3,200 territory now in sight.

What happened? Amazon’s second quarter, where the resulting revenue missed estimates. The topline was a remarkable $113.08 billion but that was nonetheless below the Street consensus of $115.2 billion. Probably worse was the company’s weaker than expected outlook for the third quarter, where management said growth rates going forward will likely be modest compared to last year’s pandemic-related boom in online retail. For its Q3 operating income, for example, Amazon pegged it at between $2.5 and $6.0 billion compared to $6.2 billion for the third quarter 2020.

Google, by contrast, has seen its share price continue on a very steady rise over the past 12 months, unlike many of the big tech names including Amazon. The stock is now almost a double from about $1,400 last September to now in the $2,700 range. 

Burrows said that’s due to accelerated earnings growth, quarter after quarter.

“Google is a real juggernaut in the ad business. If you look at their earnings, the reason the stock is acting the way that it is, is because in the last number of quarters they went from flat earnings growth to up 24 [per cent] to up 29 to up 99 to 190 per cent,” he said.

“I always love to see accelerating earnings growth, and that’s that’s why the stock is as strong as it is,” Burrows said.

Alphabet’s second quarter 2021, delivered on the same day as Amazon’s Q2, saw the company smash analysts’ estimates for both the top and bottom lines. GOOGL hit a whopping $27.26 per share in earnings compared to the expected $19.34 per share, while revenue came in at a massive $61.88 billion compared to the Street’s call for $56.16 billion.

Like Amazon, Alphabet management alluded to a more muted third quarter ahead, but the stock has nevertheless risen over ensuing weeks.

“In Q2, there was a rising tide of online activity in many parts of the world, and we’re proud that our services helped so many consumers and businesses,” said Sundar Pichai, CEO of Google and Alphabet, in a press release. “Our long-term investments in AI and Google Cloud are helping us drive significant improvements in everyone’s digital experience.”

For Burrows, the trials and tribulations of the FAANG group of tech stocks should make up only a part of an investor’s focus going forward. In fact, he says there are better places to direct your attention.

“If you’re going to be in these large cap tech stocks, Google would be a favourite and Facebook will be a favourite. However, I do think we’re in a world where you can expand beyond tech, and there are other areas of the market that are less well-owned. [For example], industrials and some financials. There are some exciting growth opportunities there as well,” Burrows said.

“For Amazon, your risk right now is it’s a little bit of dead money in the short run, [but] it will grow into its share price,” he said. “Google is right in the sweet spot right now within tech, and outside of tech you’re going to have lots of opportunities.”