Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) are among the most powerful and influential tech companies in the world. Both have delivered rock-solid financial performance for investors over the past several years, and they are also direct competitors in the much promising online advertising industry. Which one is a better buy in 2016: Alphabet or Facebook?
A race to the top in online advertising
Online advertising is a remarkably exciting business, as it offers investors a chance to profit from spectacular opportunities in the long term. According to estimates by Forrester Research, the U.S. digital advertising market will be worth $103 billion in 2019, and global markets still have massive room for expansion over the coming years.
Alphabet has long been the undisputed industry king thanks to the popularity of its Google Search engine and other tremendously valuable properties such as Android, YouTube, Maps, Gmail, Maps, and Google Play. However, the company never managed to make big inroads into social media, as its Google+ initiative didn't gain much traction among users.
Facebook has really cracked the code in social media. The company ended the third quarter of 2015 with a massive user base of 1.55 billion monthly users. Management is also doing a sound job of monetizing that user base. Facebook is rapidly gaining ground in key growth areas such as mobile and display advertising.
The two companies are increasingly going against each other. Alphabet has made a deal with Twitter (NYSE:TWTR) to make tweets available in Google Search results. Both Twitter and Alphabet benefit substantially from this kind of collaboration. Twitter gets more traffic from outside sources by partnering with a leading industry player like Google, while Alphabet expands its presence in social media by making Twitter content available in its search engine.
Facebook is working on better technologies to make its search service more powerful, and according to a recent research report from IgnitonOne, the social network is stealing market share away from Alphabet's Google in the important display ads segment. Facebook is also aggressively betting on video content to gain ground against Alphabet's YouTube platform.
The battle between the two leaders in online advertising has been getting tougher over the past few years, and everything indicates that the competition will become even more intense in the near future.
By the numbers
Alphabet is much bigger than Facebook in terms of both market capitalization and annual revenue. However, Facebook is growing at a faster rate. This is clearly reflected on different valuation ratios for the two companies, as Facebook is priced at a substantial premium versus Alphabet in terms of ratios such as price-to-sales and forward price-to-earnings.
|Company||Market Cap||Forecasted Sales 2015||Fixed Currency Sales Growth Q3 2015||Forward P/E||Price to Sales|
|Alphabet||$510 billion||$20.8 billion||21%||22||7|
|$297 billion||$17.4 billion||51%||37||19|
Alphabet or Facebook?
Both companies are attractive growth names with solid prospects over the coming years, and there are valid reasons to own both Alphabet and Facebook as part of a well-diversified growth portfolio. On the other hand, there are also some important differences to consider.
Because of its size and its ubiquitous presence across the Web, Alphabet is arguably the strongest company in the online world. The stock is also more reasonably valued, so there is a fairly good chance that Alphabet will continue delivering solid returns for investors over the coming years. When it comes to predictability and visibility of future returns, Alphabet is the clear winner.
On the other hand, size can be a disadvantage when it comes to growth, since it's more difficult to sustain rapid expansion from a bigger revenue base. This means you just can't expect Alphabet to deliver the same kind of explosive growth as Facebook. The social network is priced for more demanding expectations, and this is an important risk factor to watch. However, Facebook will probably continue outgrowing Alphabet in the middle term.
It all depends on what you are looking for, Alphabet is an industry juggernaut offering more soundness and predictability, while Facebook provides higher risk and superior potential for growth. Depending on your own investment strategy and risk tolerance, you may want to choose one or the other.
Perhaps more interesting, buying both Alphabet and Facebook could be a smart idea. By owning the two industry leaders, the competitive risk is diversified away, and you still get a fairly good chance to profit from massive growth opportunities in online advertising in the long term.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andrés Cardenal owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.