Big technology companies seem to be steadily taking over the world, so it's natural that many investors want to invest in one or more of them.
We're going to explore which two of the "big tech" stocks -- social media behemoth Facebook (FB +0.58%) or Alphabet (GOOGL 0.04%)(GOOG +0.05%), parent company of search-engine giant Google -- currently looks like the better investment for the long run.
Image source: Getty Images.
For some context before we dive in, the following chart shows how shares of the two companies have performed over the last five years. Shares of both companies have handily outperformed the broader market over this period, though Facebook stock takes the gold.
Data by YCharts. Alphabet Class A (GOOGL) shares in orange and Class C shares (GOOG) in red.
Business snapshots
Along with both being internet companies, Facebook and Alphabet share another key commonality: They both have advertising-based business models. Facebook, which was founded in 2004 and went public in 2012, is the leading social media company, thanks to its flagship social-networking platform. It also owns Instagram and messaging apps WhatsApp and Messenger. In the second quarter, the company generated more than 98% of its total revenue from digital advertising sales, while the remainder came from other sources such as payments and sales of its virtual-reality (VR) headsets.
Alphabet, which recently celebrated its 21st birthday (you can read about 21 things to love about the company and its stock here) and joined the public markets in 2004, dominates the U.S. and global search engine markets. It's also expanded into many other businesses, some of which also generate money from advertising (such as YouTube), and others that aren't advertising based. In the second quarter, nearly 84% of its revenue came from selling ads, about 16% came from Google's "other revenue" category (comprised mainly of cloud and hardware), and less than 1% was derived from other bets (formerly Moonshots).
Key data
|
Metric |
| Alphabet |
|---|---|---|
|
Core businesses |
Social networking and messaging. (Digital advertising is how it makes nearly all of its money.) |
Search engine. (Digital advertising is how it makes the bulk of its money.) |
|
Other notable businesses |
N/A | Many -- including its cloud computing service, hardware (Android phones and smart-home), and self-driving vehicle (Waymo) businesses. |
|
Market capitalization |
$539 billion |
$861 billion |
|
Forward price-to-earnings (P/E) | 19.9 | 22.3 |
|
Five-year PEG (P/E to growth) | 1.4 | 2.0 |
|
Projected average annual earnings growth over the next five years* | 22.2% | 12.6% |
Data sources: Y!Finance and YCharts. Data as of Oct. 15, 2019. *Wall Street's consensus estimates.
So far, Facebook is looking best from a quantitative standpoint, while Alphabet looks stronger qualitatively, thanks to its diversity and involvement in a very high growth space (cloud computing) and another realm that's poised to take off in the intermediate term (driverless vehicles).
Management
Both companies are led by a founder -- Mark Zuckerberg at Facebook and Larry Page (a co-founder) at Alphabet. This gets them both check marks in the advantages column, as studies have shown that founder-led U.S. companies tend to outperform in the stock market over the long term.
Page keeps a fairly low profile, which is possible since Alphabet's Google has its own CEO, Sundar Pichai, who's the face of the company at many events. While top management might get high marks on many key aspects, it's poorly handled sexual misconduct claims.
Earlier this year, shareholders filed a lawsuit against Alphabet and certain officers and directors alleging their actions opened up the company to financial losses and damage to its reputation. Those actions involve including huge payouts in the exit packages of top male Google executives accused of sexual misconduct. Not only are such actions costly, they can depress overall employee morale.
Meanwhile, Facebook's top management got dinged for its handling of data security and privacy. One can't help but conclude that they've overemphasized making a buck at the expense of adequately safeguarding their users' data.
Their years-long lackadaisical attitude about these subjects led to the Cambridge Analytica scandal, which involved the unauthorized sharing of personal Facebook data of about 50 million people and possibly influenced the outcome of the 2016 Presidential election. The company was fined a record $5 billion by the Federal Trade Commission (FTC).
The better stock bet for the long term?
Both companies have their good points and seem to have much growth potential, though they also both have drawbacks.
That said, while I think Facebook stock might outperform in the short-to-intermediate term, I'd give Alphabet stock the edge as a long-term bet. Why? The company is more diversified, has less of an exposure to changing consumer tastes -- and consumers are notoriously fickle -- and is apt to come under less regulatory scrutiny than Facebook.
