Which Technology Giant Is the More Attractive Investment Currently?
Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) and Meta Platforms (NASDAQ: META) are among the world’s largest tech corporations. Meta leads the social media sector with Facebook, Messenger, Instagram, and WhatsApp, while Alphabet owns Google, YouTube, Android, Gmail, Chrome, and Google Cloud.
In 2021, Alphabet and Meta reached record highs during the growth stock-buying craze. However, as of this writing, Alphabet and Meta’s shares are trading about 30% and 40% below their all-time highs, respectively. We will explore why the market sentiment changed for these two FAANG stocks and whether either will rebound later this year.
Comparing Similarities and Contrasts
Alphabet and Meta primarily generate their revenue from online advertisements. In their most recent quarters, 78% of Alphabet’s revenue came from Google’s advertising services (including YouTube), while ads contributed 98% of Meta’s revenue.
Over the past year, both companies have struggled with slow ad sales due to macroeconomic challenges that forced businesses to cut marketing expenses. They also faced stiff competition from ByteDance’s TikTok in the short video market. TikTok prompted Alphabet to launch YouTube Shorts and Meta to launch Reels on Facebook and Instagram.
Apple’s privacy updates on iOS, allowing users to opt out of data-tracking features, impacted Alphabet and Meta differently. Alphabet remained unaffected by this change for two reasons: it mainly uses first-party data for ad targeting and pays Apple billions annually as the default search engine on iOS devices. In contrast, Meta’s targeted ads were significantly disrupted due to the sudden loss of third-party data.
Another critical distinction lies in their secondary businesses. Alphabet’s secondary business, Google Cloud, represented 11% of its revenue last quarter. In Q1 2023, it reported its first operating profit after ranking third among global cloud infrastructure platforms, following Amazon Web Services (AWS) and Microsoft Azure.
Meta’s secondary business is Reality Labs, responsible for its virtual and augmented reality products. Only 1% of Meta’s revenue was generated by Reality Labs last quarter, but the company lost $3.99 billion and its total operating profit was $7.22 billion. Meta anticipates increasing costs as it expands its “metaverse” ecosystem.
Which Company Exhibits Faster Growth?
Both companies’ ad sales decreased in 2022, decelerating their growth. However, Meta encountered a more severe slowdown due to greater exposure to Apple’s platform changes and more direct competition with TikTok in social media.
Alphabet counterbalanced Google’s advertising slowdown with Google Cloud’s growth and subscription-based media services (YouTube TV and YouTube Music Premium), while Meta’s Reality Labs failed to compensate for its weaker ad sales.
Both companies observed stabilization in their ad sales in Q1, suggesting that macro headwinds may subside in the coming quarters. Meta is progressing against TikTok with Reels and continues to collect more first-party data across its ecosystem to create better-targeted ads on iOS devices.
According to analysis, Alphabet is expected to grow its revenue by 6% in 2023 and 11% in 2024, and Meta will grow its revenue by 8% in 2023 and 11% in 2024. Although these forecasts should be taken cautiously, they imply that their recent challenges are temporary and will likely fade as the macroeconomic climate improves.
Which Company Boasts Higher Profitability?
Alphabet’s operating margin dropped from 31% in 2021 to 26% in 2022, then dipping five percentage points year-over-year to 25% in Q1 2023. This decrease resulted from a loss of pricing power in the advertising market, partially offset by recent layoffs and other cost-cutting initiatives.
Analysts anticipate Alphabet’s earnings to grow 15% in 2023 and 18% in 2024. Based on these projections, its stock trades at 19 times forward earnings, making it the most affordable FAANG stock.
Meta’s operating margin fell from 40% in 2021 to 25% in 2022 and then declined another six percentage points year-over-year to 25% in Q1 2023. This decrease was due to falling ad prices, partially compensated by rising ad impressions and the considerable losses incurred by the Reality Labs segment.
Wall Street analysts predict Meta’s earnings to grow 25% in 2023 and 2024. Based on these estimates, its stock appears reasonably valued at 24 times forward earnings.
The Victor: Alphabet
Although both FAANG stocks will likely recover if a new bull market emerges, Alphabet’s stronger growth, lower valuations, and focus on cloud infrastructure instead of the metaverse make it a more appealing investment than Meta.
While Alphabet and Meta Platforms remain prominent players in the technology sector, Alphabet is the more attractive investment option. Its solid growth, competitive valuation, and commitment to the thriving cloud computing market give it an edge over Meta’s metaverse ambitions. As the technology landscape evolves and market conditions shift, investors should stay vigilant and regularly reassess their investment strategies to capitalize on emerging opportunities.
