Better Buy: Alibaba vs. Alphabet

These two technology giants are leaders in their respective markets. Discover what makes one a better investment choice.

Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) and Alibaba Group Holding (NYSE:BABA) are two of the world's largest tech titans. Alphabet's Google dominates online search and advertising in the U.S. and many other countries, and Alibaba is the e-commerce leader in China.

Both were experiencing strong revenue growth before the coronavirus pandemic, but the resulting global economic downturn adds new challenges. Does the decline in the global economy mean one is a better buy for investors? Let's look at each to find out.

Alibaba's strengths

Alibaba began as an e-commerce company but has evolved past its origins. Its varied businesses extend into advertising, cloud computing, logistics, and entertainment. Even with this diversification, though, its core e-commerce business represents 82% of the company's revenue.

That digital economy preserved Alibaba's revenue performance in the face of the pandemic. China experienced an economic slowdown from the government-imposed lockdown that began in January. Nonetheless, in the quarter and fiscal year that ended March 31, revenue in the quarter increased 22% year over year.

Its e-commerce business drove the growth with a 19% rise in year-over-year revenue. In fact, the company saw year-over-year revenue growth across all business segments for the quarter.

Alibaba's cloud computing division, representing 11% of company revenue, experienced a 58% increase. The digital media and entertainment segment saw 5% revenue growth, and its remaining businesses, which account for 2% of revenue, rose 90%.

That growth in the face of a pandemic is impressive, but that's not all the company achieved. For its 2020 fiscal year, Alibaba reached the milestone of $1 trillion in gross merchandise value (GMV), a measure of the total value of transactions generated through its digital platforms.

The company also grew the number of active Chinese consumers who used its services in the past year by 72 million over fiscal 2019. The company now reaches 960 million consumers globally, with 780 million of those in China.

Alphabet's advantages

While Alphabet's first-quarter results were affected by the pandemic, the impact didn't begin until March, when global government lockdowns began and economies declined.

Alphabet generates the bulk of its revenue from advertising, and the economic slowdown resulted in advertisers cutting back their spend in March. Prior to that, according to CEO Sundar Pichai, revenue was strong, but in March, the company experienced "a significant and sudden slowdown in ad revenues."

Even with the decline, Alphabet delivered $41.2 billion in revenue for the first quarter, a 13% year-over-year increase. But in the short term, the drop in ad revenue will impact further growth in 2020, with the company announcing a pullback in expenditures such as hiring and investments in hardware.

The company's nonadvertising revenue streams experienced double-digit growth in the quarter. The Google Cloud division, which provides cloud computing services, saw year-over-year revenue grow 52%. Its other businesses, including YouTube's premium streaming video, rose 23% primarily thanks to strong YouTube subscriber growth and revenue from the company's Play app store. Although nonadvertising sales contributed only 18% of the company's overall Q1 revenue, that percentage increased from 16% last year.

Alphabet's financial health is excellent, and the company can easily weather the current economic slowdown. Its total assets of $273.4 billion at the end of Q1 dwarf its total liabilities of $69.7 billion. It held $19.6 billion in cash and equivalents and generated free cash flow of $5.4 billion.

The final verdict 

Despite the pandemic's challenges in the first three months of 2020, both Alibaba and Alphabet delivered strong quarterly results thanks to dominant positions in their respective markets.

Alphabet will see continued effects on revenue in the second quarter from global lockdowns. Alibaba's Q2, meanwhile, benefits from China's easing of pandemic-related restrictions that began toward the end of February.

But the company poses additional investment risks unrelated to its performance. The current political tensions between the U.S. and China might go far enough to see Alibaba delisted from the New York Stock Exchange.

Politics aside, both are solid technology companies. For investors seeking peace of mind, however, Alphabet is the clear choice. The current economic downturn and accompanying decline in ad revenue will pass. In the long run, Alphabet's rock-solid financials and encouraging diversification efforts beyond advertising mean further growth.