Meta Platforms (META 0.43%) and Alphabet (GOOG 9.96%) (GOOGL 10.22%) headed in opposite directions after their latest earnings reports. Meta's stock soared 20% to an all-time high on Feb. 2, after the social media giant followed up its big fourth-quarter earnings beat with rosy guidance for the first quarter, a $50 billion boost to its buyback plan, and the initiation of its first-ever dividend. Alphabet's stock sank 8% on Jan. 31, even though its fourth-quarter numbers easily cleared analysts' expectations with double-digit growth across its core businesses.
As of this writing, Meta's stock has rallied more than 150% over the past 12 months. Alphabet's stock has rallied just over 30%. Let's see why the bulls rushed to Meta instead of Alphabet -- and if that trend will continue throughout the rest of 2024.
Image source: Getty Images.
The similarities and differences
Meta and Alphabet both generate most of their revenue from digital ads, but their business models are different. Meta is the world's largest social media company, and 3.98 billion people use at least one of its core apps -- Facebook, Messenger, Instagram, and WhatsApp -- every month. It sells its ads across all four platforms, as well as its Audience Network for third-party apps and websites. It's also producing augmented and virtual reality devices through its Reality Labs segment.
Alphabet's Google owns the world's largest search engine, the top streaming video platform in YouTube, and the most popular mobile operating system in Android. It also owns the world's third largest cloud infrastructure platform, sells its own first-party hardware devices, and develops self-driving vehicles through its Waymo subsidiary.
Google and Facebook controlled 39% and 18% of the global digital advertising market in terms of annual revenue, respectively, in 2023. But both companies face stiff competition from ByteDance's TikTok, which claimed 3% of the market and continues to lock in younger audiences with its short videos. To counter TikTok, Google has been beefing up YouTube Shorts, while Meta has been expanding its similar Reels across Facebook and Instagram.
Why did the bulls love Meta more than Alphabet?
Meta and Alphabet generated 98% and 77% of their revenue, respectively, from digital ads in 2023. Both companies struggled with slower ad sales in 2022, as the macro headwinds drove more businesses to rein their ad spending.
Meta also struggled with Apple's (NASDAQ: AAPL) privacy changes on iOS, which made it tougher to craft targeted ads from third-party data. Google wasn't as affected by the iOS update, because it mainly relied on first-party data and already paid Apple billions of dollars each year to remain the default search engine on iOS. But despite all of those challenges, Meta's ad revenue grew at a much faster rate than Google's over the past year.
|
Metric |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Meta ad revenue growth (YOY) |
(4%) |
4% |
12% |
24% |
24% |
|
Google ad revenue growth (YOY) |
(4%) |
0% |
3% |
9% |
11% |
Data source: Company earnings reports. YOY = Year over year.
Meta outperformed Google for three reasons. First, Chinese e-commerce and gaming companies significantly ramped up their spending on Facebook and Instagram to reach more overseas users. Second, Meta countered Apple's changes by gathering more first-party data and upgrading its AI algorithms. Lastly, its higher ad impressions offset its lower ad prices.
Google didn't seem to attract as much spending from those Chinese companies, and declining impressions across its sprawling ad network partly offset its rising impressions across its core search engine and YouTube. Google's growing dependence on ad-free subscriptions for YouTube and YouTube Music also suggested its advertising business was running out of steam. Meanwhile, Google's closely watched cloud business continued to grow at a slower rate than its larger rival, Microsoft (NASDAQ: MSFT) Azure, which implied it was falling behind in the cutthroat cloud and AI race.
Meta's rising ad revenue, layoffs, and other cost-cutting measures boosted its operating margin from 25% in 2022 to 35% in 2023, even as it ramped up its spending in its unprofitable Reality Labs business. Alphabet also executed several rounds of layoffs, but its operating margin rose from 26% in 2022 to just 27% in 2023.
Will Meta stay ahead of Alphabet this year?
Analysts expect Meta's revenue and earnings to grow 12% and 18%, respectively, in 2024. Based on those estimates, which might need to be raised after Meta's latest earnings beat, its stock doesn't look particularly expensive at 28 times forward earnings. Its forward yield of 0.4% won't attract any serious investors, but it's a clear sign that it can continue to generate a stable profit while expanding its metaverse ecosystem.
Analysts expect Alphabet's revenue and earnings to rise 11% and 17%, respectively, in 2024. It doesn't pay a dividend yet, but its stock looks a bit cheaper at 21 times forward earnings. However, concerns about its advertising business and its ability to keep pace with Microsoft in the AI race could continue to compress its near-term valuations.
It's a close call, but I believe Meta will continue to outperform Alphabet this year as its advertising growth accelerates and it expands its operating margin. Its simpler business model could also make it more appealing for growth-oriented investors.
