You'd be hard-pressed to find two companies with larger user bases than Alibaba (NYSE:BABA) and Facebook (NASDAQ:FB). Alibaba now has 824 million monthly active users (MAU) across its retail platforms, while Facebook has over 2.9 billion MAUs across its family of apps. Both have a market capitalization close to $600 billion, and trade at a forward P/E ratio of 25 and 20, respectively. Despite some parallels, I believe one of these stocks is the clear better buy today.

Woman shrugging

Image source: Getty Images.

How Facebook can grow

Since it went public in 2012, Facebook is one of the greatest examples of a growth stock on the market, with double-digit gains in revenue growth and net income growth seemingly without end.

However, the revenue growth rate is now slowing. In the 2019 fourth-quarter earnings call, CFO Dave Wehner explicitly stated what investors feared: in the upcoming first quarter of 2020, the revenue growth rate will drop low to mid-single digits as compared to the fourth quarter's 25% revenue growth. While double-digit revenue growth is still incredible, slowing growth shows that Facebook needs a new revenue growth driver. 

FB Chart

FB data by YCharts

With $71 billion in trailing-12-month revenue, it won't be easy to find fresh growth. But Facebook does have a couple of new revenue-stream possibilities in the works. Its virtual reality (VR) platform seems to be picking up steam, with over $5 million in Oculus store sales on Christmas day alone. The company is targeting 1 billion VR users long term -- an incredibly lofty goal it's currently nowhere close to reaching.

Then there's Facebook's WhatsApp. The messaging app recently surpassed 2 billion users, and Facebook still hasn't figured out how to monetize them. There are a couple of possibilities. Facebook is experimenting with new features for businesses to sell products on WhatsApp. And it also expects to roll out WhatsApp Payments in the first half of 2020. Given Facebook's past success with both Facebook and Instagram, I bet it'll find a way with WhatsApp eventually.

There's more potential as Facebook rolls out an app to compete with Pinterest called Hobbi and a dating feature within Facebook to compete with Match Group. But it's possible that Facebook won't be able to monetize anything beyond its Facebook and Instagram platforms. None of these possibilities are guaranteed winners.

The Chinese cloud giant?

While Facebook is looking for its next big revenue driver, Alibaba has already found one. In the third quarter of fiscal 2020, Alibaba Cloud revenue grew 62% year over year, surpassing 10 billion yuan ($1.5 billion) for the first time. It now comprises 7% of Alibaba's total revenue after several quarters of hot growth. Here are the last eight quarters of Alibaba Cloud's revenue growth.

Quarter and fiscal year Alibaba Cloud revenue YOY revenue growth
Q3 2020 $1.5 billion 62%
Q2 2020 $1.3 billion 64%
Q1 2020 $1.1 billion 66%
Q4 2019 $1.2 billion 76%
Q3 2019 $1.0 billion 84%
Q2 2019 $0.8 billion 90%
Q1 2019 $0.7 billion 93%
Q4 2018 $0.7 billion 103%

Data from Alibaba. Chart by author. YOY = year-over-year.

Over the last year, Alibaba Cloud has generated over $5 billion in revenue, and its growth rate indicates there's still plenty more coming. Indeed, Alibaba claims that public cloud use in China has only reached 10% penetration.

As Chinese enterprise continues migrating to the public cloud, Alibaba Cloud seems to be the primary beneficiary. According to Canalys, China's cloud spending grew 60.8% last quarter. Alibaba Cloud's growth outpaced that with 62% growth, and it now has 43% Chinese market share.

Admittedly, only focusing on Alibaba Cloud neglects 93% of Alibaba's current business. But the Alibaba Cloud surge is reminiscent of Amazon's Amazon Web Services (AWS). At one time, investors ignored AWS segment revenue because it was a small part of Amazon's business. But nowadays, as one analyst put it, AWS does the "heavy lifting" for company revenue. At the rate Alibaba Cloud is winning in China, the same thing could happen here.

The better buy

To be clear, I actually like both stocks today. I believe there's a good chance that Facebook finds revenue growth from WhatsApp monetization, or by some other means. But even if it doesn't, the core business is still growing, it is solidly profitable ($18.5 billion net income in 2019 despite a $5 billion legal settlement), and it trades at a reasonable valuation.

But I like Alibaba a little more. While its core business remains strong, it's already found its growth driver for the foreseeable future. However, patient investors may choose to wait before buying, as Alibaba has already told investors there will be negative economic effects in coming quarters from the novel coronavirus outbreak (officially called the COVID-19 outbreak). The stock could quite volatile over the next couple of quarters. But long term, this company is worth owning and the better buy.