Alphabet (GOOG 0.20%) (GOOGL 0.41%) and Meta Platforms (META +0.22%) are two of the largest tech companies in the world. Alphabet owns Google, YouTube, Android, Gmail, Chrome, and Google Cloud, while Meta dominates the social networking space with Facebook, Messenger, Instagram, and WhatsApp.
Alphabet and Meta both reached record highs during the growth stock buying frenzy in 2021. But as of this writing, shares of Alphabet and Meta trade approximately 30% and 40%, respectively, below those all-time highs. Let's see why the bulls retreated from these two FAANG stocks, and if either one will bounce back later this year.
Image source: Getty Images.
The similarities and differences
Alphabet and Meta both generate most of their revenue from online ads. In their latest quarters, Alphabet generated 78% of its revenue from Google's advertising services (including YouTube), while ads accounted for 98% of Meta's revenue.
Both companies grappled with sluggish ad sales over the past year as the macroeconomic headwinds forced companies to reduce their marketing expenses. They also faced intense competition from ByteDance's TikTok in the short video space. To counter TikTok, Alphabet rolled out YouTube Shorts and Meta launched Reels on Facebook and Instagram.
NASDAQ: GOOGL
Key Data Points
Apple's privacy changes on iOS, which enabled its users to opt out of data-tracking features, affected Alphabet and Meta differently. Alphabet didn't face any headwinds from that change for two reasons: It crafts most of its ads from first-party data, and it pays Apple billions of dollars each year to remain the default search engine for all iOS devices. Meanwhile, Meta's targeted ads were significantly disrupted by the abrupt loss of third-party data.
The other key difference lies in their secondary businesses. Alphabet's secondary business is Google Cloud, which accounted for 11% of its revenue last quarter. It's the third-largest cloud infrastructure platform in the world after Amazon Web Services (AWS) and Microsoft Azure, and its operating profit turned positive for the first time in the first quarter of 2023.
Meta's secondary business is Reality Labs, which houses its virtual and augmented reality products. The Reality Labs segment only generated 1% of its revenue last quarter, but it racked up an operating loss of $3.99 billion -- compared to its total operating profit of $7.22 billion. Meta expects those costs to rise this year as it expands its "metaverse" ecosystem.
NASDAQ: META
Key Data Points
Which company is growing faster?
As the following table illustrates, both companies experienced decelerating growth in 2022 as their ad sales cooled off. But Meta suffered a more severe slowdown than Alphabet because it was more heavily exposed to Apple's platform changes. It also faced more direct competition against TikTok in the social media space.
Alphabet offset the slowdown of Google's advertising business with the growth of Google Cloud and its subscription-based media services (YouTube TV and YouTube Music Premium), but Meta's Reality Labs business failed to offset its slower ad sales.
|
Revenue Growth by Company (YOY) |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
|---|---|---|---|---|---|
|
Alphabet |
23% |
21% |
6% |
1% |
3% |
|
Meta Platforms |
7% |
(1%) |
(4%) |
(4%) |
3% |
Data source: Company earnings reports. YOY = Year-over-year.
Both companies experienced a stabilization of their ad sales in the first quarter, which suggests the macro headwinds will weaken over the next few quarters. Meta is making progress in countering TikTok with Reels, and it continues to gather more first-party data across its ecosystem to craft better targeted ads on iOS devices.
Analysts expect Alphabet's revenue to rise 6% this year and 11% in 2024. They expect Meta's revenue to increase 8% in 2023 and 11% in 2024. We should take those forecasts with a grain of salt, but they imply their recent challenges are merely cyclical ones that will pass as the macro environment improves.
Which company is more profitable?
Alphabet's operating margin declined from 31% in 2021 to 26% in 2022, then slipped five percentage points year over year to 25% in the first quarter of 2023. That contraction was caused by a loss of pricing power in the advertising market, which was partly offset by its recent layoffs and other cost-cutting measures.
Analysts expect Alphabet's earnings to rise 15% this year and grow 18% in 2024. Based on those expectations, its stock trades at 19 times forward earnings -- making it the cheapest FAANG stock right now.
Meta's operating margin plunged from 40% in 2021 to 25% in 2022, then dropped another six percentage points year over year to 25% in the first quarter of 2023. That decline was caused by its declining ad prices, which were partly offset by a growing number of ad impressions, and the Reality Labs segment's staggering losses.
Wall Street analysts expect Meta's earnings to grow 25% in both 2023 and 2024. Based on those estimates, its stock still looks reasonably valued relative at 24 times forward earnings.
The winner: Alphabet
Both of these FAANG stocks will likely recover if a new bull market starts, but Alphabet's stronger growth, lower valuations, and commitment to the cloud instead of the metaverse make it a better overall investment than Meta right now.
