Forced to choose, would Cramer buy Amazon or Google?
Sometimes stock picking forces investors to make tough decisions. And if you're currently trying to decide whether Google or Amazon is the better growth play, you're facing one of the toughest decisions there is.
Jim Cramer feels your pain – he's a fan of both companies for growth.
But Amazon and Google are similar in many ways; and if you're an individual investor with limited capital, buying the stocks of both companies is not only prohibitively expensive, it goes against Cramer's cardinal rule of diversifying your portfolio.
Therefore, in his new book Get Rich Carefully, Jim Cramer details a proprietary litmus test to help investors decide between two enticing growth stocks.
Following are his insights as he applied that litmus test to Amazon and Google.
Test #1: Is there potential for multiyear growth that you can put a value on?
"Amazon has this in spades: the worldwide retail opportunity is enormous and Amazon is in a tremendous position to take market share as people do more and more of their shopping online," Cramer said.
Although Google dominates search and although its Android mobile operating system runs on more than half of smartphones in the U.S. Cramer said, "my one knock on Google here is that they don't do business in China, the world's fastest growing market for the Internet.
Score: I give Amazon a 10 here and Google a 7.
Test #2: Is the total addressable market big enough for the company to sustain its growth?
"For Amazon this one's easy—this company is the Wal-Mart of the Web," Cramer noted, "and there are still plenty of brick and mortar retailers they can take share from, which means Amazon may have the largest total addressable market in the world."
"As for Google, they sell into several different markets that are all growing like weeds," Cramer added.
Score: I say Google and Amazon both get a 10 here.
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Test #3: Can the company stay competitive?
"Amazon has developed tremendously loyalty in its e-commerce business, as well as its fulfillment business. Even the Kindle seems to be unable to be felled by rival products," Cramer said.
Although Google is extremely dominant, Cramer believes both Yahoo and Facebook are growing so aggressively that either could 'cut into Google's search business with clever graphical search that's more targeted.'
Score: I give Amazon a 10 here and Google an 8.
Test #4: Can the company return capital over time via dividends and buybacks, or does it have such a well-defined growth path that we want them to keep piling their money into the business in order to fuel more revenue growth?
"Amazon has oodles of growth ahead and the company needs to keep investing in warehouses and technology so it can remain dominant," Cramer said.
"Google also has a ridiculous amount of growth ahead of it with initiatives that require the company to keep spending to maintain consistent revenue growth. But the problem with Google is that it often seems to spend a lot of money on projects that seem uneconomical or even foolish, like the $12.5 billion Motorola Mobility acquisition."
Score: Here I give Amazon a 9 and Google a 7.
Test #5: Can the company expand internationally?
"Amazon has an incredible opportunity to expand worldwide as the rest of the globe rapidly adopts the Internet. The company already has 13.5% of all international e-commerce transactions, but that's still less than one percent of global retail sales, so I think the opportunity here is enormous," Cramer said.
Although Google gets more than half of its revenues overseas, Cramer doesn't like Google's minimal presence in China. "Long-term that's a big problem," Cramer said.
Score: I give Amazon an 10 and Google an 8 here.
Test #6: Can the balance sheet support strong growth?
Amazon and Google both pass this one with flying colors.
Score: Give them a pair of tens.
Test #7: Is the stock expensive on the out years?
For this metric, Amazon's multiple emerges as the proverbial elephant in the room. "Amazon is incredibly expensive on next year's earnings estimates, and it's still pretty darned pricey on what it could earn in 2018," Cramer said.
Conversely, "Google is real cheap on the out-years, trading with a single-digit price to earnings multiple based on the earnings estimates five years down the road."
Score: I give Amazon a 5 here and Google a 10.
Test #8: Does the company have the right management?
"I think there's no doubt that Jeff Bezos, the visionary founder and CEO of Amazon, is the right man for the job. My only fear is that I have no idea who else is running the show besides Bezos—other than him, Amazon's management is like a black box."
"As for Larry Page, Google's co-founder, he's done a terrific job since he took over as CEO in April of 2011, reorganizing the company around individual product areas and empowering executives in the newer revenue streams to grow their business lines faster."
Score: I give Google a 10 here, and Amazon and 8 simply because I worry about what happens when Bezos retires.
Test #9: Does the company need economic growth to make its numbers?
Although Cramer sees both Amazon and Google as secular rather than cyclical growth companies he does worry that Google has a little more vulnerability to economic woes. "Advertisers tend to cut back on spending during times of economic hardship."
Score: I give Amazon a 10 and Google a 9.
Test #10: Can the company maintain or grow its margins?
Cramer said that Google has the edge "because Amazon, by its very nature as an ultra-cheap online retailer, simply can't have good gross margins."
Score: Let's give Google a 10 and Amazon a 7 on this one.
The results: "When you go through all ten growth tests and add up the scores, Amazon beats Google by a nose, at 89 points to 87," Cramer said. "Again, these are both fabulous stocks, but if you put a gun to my head, I'd have to tell you that Amazon is the better growth name."
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