Innovative. Game-changing. Fortune-making. All three descriptions apply to Amazon (AMZN -1.23%) and Tesla (TSLA 0.10%). The companies are obviously quite different, but still have some things in common.
Both Amazon and Tesla have delivered disappointing stock performances over the last year. However, many investors see a lot to like with each stock going forward. But which is the better buy in 2023? Here’s how Amazon and Tesla stocks stack up against each other.
Problems and challenges
Most people prefer to hear the bad news before the good news. With that in mind, let’s start by addressing the problems and challenges for these two companies.
The biggest problem for Amazon right now is that its revenue growth is slowing. In addition, the company’s profits are falling, dragging down free cash flow as well. It’s easy to identify the culprits for both concerning trends.
Inflation and overall worries about the economy appear to be the main reasons behind Amazon’s sluggish sales growth. In the company’s third-quarter conference call, CFO Brian Olsavsky acknowledged the negative effect of inflation, in particular.
Meanwhile, Amazon’s profits have declined because its spending has risen. In the first three quarters of 2022, the company’s operating expenses grew more than 14%, while its revenue rose by less than 10%.
Tesla disappointed investors with its fourth-quarter production and delivery numbers. This was especially concerning because the company also announced steep price cuts for its electric vehicles.
Like Amazon, Tesla also faces macroeconomic headwinds. Competition is increasing for Tesla as other major automakers ramp up their production of electric vehicles. It also hasn’t helped the stock’s performance that CEO Elon Musk has appeared to focus more on Twitter in recent months than on Tesla.
The good stuff
But there are a lot of things for investors to like about both Amazon and Tesla. One common denominator is that they’re both priced more attractively after their steep sell-offs.
It looks like inflation won’t be as big a problem for Amazon this year, thanks to aggressive interest rate hikes by the Federal Reserve. The company’s cost-cutting initiatives could boost profits.
Amazon’s long-term opportunities remain strong. E-commerce accounted for only 14.8% of total retail sales in the U.S. in the latest numbers from the Commerce Department. That gives Amazon plenty of room to grow.
Amazon Web Services (AWS) remains the leader in the fast-growing cloud hosting market. Well-known investor Bill Miller thinks that AWS by itself justifies Amazon’s current market cap.
Tesla is more profitable than ever, posting earnings of $3.3 billion in the third quarter of 2022. Despite the latest disappointing delivery numbers, the company still expects to increase deliveries and revenue production at a compound annual growth rate of at least 50% over the long term.
The market for EVs should expand significantly over the next decade and beyond. While Tesla will face more competition, the company has a key competitive advantage with its network of supercharging stations.
I understand why many investors are bullish about Tesla. However, I think that Amazon is the better stock to buy in 2023.
My take is based largely on what I see as differing earnings trajectories for the two companies. Amazon’s earnings should increase this year thanks to its cost reductions. Tesla’s profit margins, on the other hand, are likely to decline.
Over the longer term, I expect that Amazon will be the bigger winner for two other reasons. First, the company’s moat is stronger than Tesla’s, in my opinion. Second, Amazon has more ways to generate new growth than Tesla does (including, for example, healthcare and home robotics).
Both companies could very well continue to be highly innovative and game-changing. But I suspect that Amazon will help investors build greater fortunes going forward than Tesla will.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com and Tesla. The Motley Fool has a disclosure policy.