Alphabet (GOOG 9.96%) (GOOGL 10.22%) and Snap (SNAP 27.63%) are competitors in the world of digital marketing. Both are using artificial intelligence (AI) tools to try and increase market share -- serving up things to help advertisers and users of their products -- but they are not equal. One of these stocks is a no-brainer buy while the other looks like its best days are in the rearview mirror.
1. Alphabet
Alphabet is the parent company of internet search giant Google and video-sharing platform YouTube. It also has a large and growing cloud computing platform (Google Cloud) that competes with the Amazon's AWS and Microsoft's Azure.
But the vast majority of Alphabet's revenue and profits are derived from advertising, mostly on Google and YouTube, which are consistently ranked as the two most-visited websites in the world, each garnering well over 100 billion monthly visits. Given the sheer amount of traffic each of these websites generates, it's not surprising that marketers flock to Alphabet for advertising campaigns.
But in an age when consumer trends and sentiment can shift quickly, how is Alphabet able to prove to advertisers that its platforms generate a superior return on investment (ROI) over the likes of Meta Platforms' Facebook and Instagram, as well as niche players like Etsy or Pinterest?
During the third-quarter earnings call in late October, Alphabet management shed some light on how the company is leveraging the power of generative AI to help advertisers judge the benefit of advertising on Alphabet platforms.
For example, tools in Google Ads help marketers analyze loads of search data to help them assess the potential ROI of a specific marketing campaign. This can help businesses better forecast how to allocate marketing dollars.
Alphabet also uses AI on the other side of ads. For instance, its virtual try-on feature helps shoppers get a better view of how apparel might look on them before ordering, as opposed to solely relying on stock images on a brand's website.
To get a sense of how these innovations are driving growth for Alphabet, consider some stats from its stellar third-quarter earnings report. For the period ended Sept. 30, the company increased advertising revenue by 9%, reaching $60 billion. Google Search revenue increased 11%, while ads from YouTube increased 12% year over year.
The chart below illustrates the forward price-to-earnings (P/E) multiple of Alphabet stock benchmarked against a cohort of other megacap technology companies. The basic takeaway is that the stock trades at a steep discount compared to other tech behemoths.
GOOG PE ratio (forward) data by YCharts.
While some are predicting an economic slowdown next year and the overall outlook for consumer spending remains cloudy, and that impacts ad spending, I'm not worried about Alphabet. The company has navigated through similar macroeconomic challenges in the past and now looks like a terrific opportunity to buy shares.
Image source: Getty Images.
2. Snap
Snap is another company that makes money from ads and is using AI to better compete. With its third-quarter earnings report in late October, the company said it reached "more than 75% of 13-to-34-year-olds in over 25 countries, with these countries representing more than 50% of global advertising spend."
It's clear that Snap has a solid place in the hearts and minds of the coveted Gen Z and millennial demographics. The problems occur when you look at Snap's finances.
| Metric | Nine Months Ended Sept. 30, 2023 | Nine Months Ended Sept. 30, 2022 | Change |
|---|---|---|---|
| Revenue | $3.24 billion | $3.3 billion | (2%) |
| Expenses | $4.39 billion | $4.41 billion | (0.4%) |
| Operating income (loss) | ($1.15 billion) | ($1.11 billion) | n/a |
| Stock-based compensation | $991 million | $937 million | 6% |
| Free cash flow | ($76 million) | ($23 million) | n/a |
Data source: Snap.
For the nine months ended Sept. 30, Snap reported total revenue of $3.24 billion, which was a decline of 2% year over year. While it's appropriate to chalk up some of this decline to macro factors, a deeper look at the financials shows that Snap has more than just top-line headaches.
Through September, operating losses mounted to $1.15 billion, worse than the year-ago period. Moreover, noncash expenses such as stock-based compensation continue to balloon. The combination of decreased revenue and virtually no reduction in expenses contributed to free-cash-flow burn of $76 million, nearly triple the level from 2022.
Snap has been talking for several months about investments in AI-powered tools, including chatbots, augmented reality, and machine learning. But as of now, it appears that these projects are costing Snap significant capital and generating insignificant growth, if any at all.
On one hand, Snap is competing against Alphabet, Meta, and even Amazon when it comes to advertising and digital commerce. And on the other, the company is staring right at Meta Platforms again as it faces steep competition from the social media giant in virtual reality and the metaverse.
To me, Snap just can't escape big tech. The company seems to be in a perpetual game of catch-up and is stuck running in place. I'd pass on Snap as an investment and look elsewhere. For current holders of the stock, it might finally be time to move on, making Snap disappear from your portfolio.
