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Why Facebook, Inc Will Narrow the Gap With Alphabet, Inc. in 2016

By Tim Brugger - Jan 20, 2016 at 7:47AM

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The two digital ad kings are far apart revenue-wise, but that will begin to change this year.

In the fast-growing world of digital advertising, Facebook (META 1.70%) and Alphabet (GOOG 2.36%) (GOOGL 2.39%) are in a league of their own. Both online behemoths have taken target marketing to a whole new level, thanks to each focusing on compiling, analyzing, and ultimately utilizing reams of user data.

As investors saw again last quarter, both Facebook and Alphabet continue to report double-digit revenue growth. Alphabet can't match Facebook's 41% jump in revenue in Q3 -- it reported $4.5 billion for the quarter, but with nearly $18.7 billion in Q3 sales, it takes a lot more for Alphabet to move the needle. However, the revenue gap between the two digital leaders is slowly but surely closing. And based on some new data, Facebook will close the gap even further in 2016.

Chart source: eMarketer.

Survey says
Thanks in large part to Alphabet's dominance, search-related digital ad revenue in the U.S. has easily led the way as it relates to total online ad sales. In 2015, marketers shelled out $26.53 billion for search spots, up from 2014's $23.44 billion.

Search also explains why $16.78 billion of Alphabet's total $18.7 billion in Q3 revenue were of the advertising variety. But there's change in the air, and this year those changes will help Facebook inch ever closer to Alphabet. According to data from eMarketer, for the first time ever U.S. marketers will spend more on digital display ads than search-related spots, much of it targeting mobile users.

In 2015, display ad spend was just shy of search, generating $26.15 billion in sales. And the recent trend of shifting spend to the Facebook's of the world rather than search will finally push it over the top in 2016. As per eMarketer, display will generate over $32 billion in revenue this year, while search will also grow, but not nearly as quickly. An estimated $29.24 billion in ad sales will be of the search ilk this year.

What does it mean?
Catching Alphabet as measured by revenue remains a long, uphill climb. That said, Facebook was already making strides to do just that, and as eMarketer's data makes clear -- for 2016 and the ensuing years -- the digital ad stars are aligning in its favor. The soon-to-be-released Q4 earnings results from Alphabet on Feb. 1, and Facebook on Jan. 27 will be another chance to measure how much headway display is making compared to search.

That said, the true measuring stick will be about this time next year. Will Facebook miraculously catch Alphabet and unseat it as the digital ad leader? Of course not. That's a multiyear battle for an "upstart" like Facebook that's about one-quarter Alphabet's size. However, what investors will see is the difference becoming less and less with the shift to display ads.

And there's more
Among Alphabet's many operating units are a number focused on its "moonshots," including its driverless car initiative, a Glass wearable device that simply won't go away, and nano-technology for the healthcare sector. How much, if anything, will these far-flung efforts boost Alphabet's total revenue? Only time will tell given many of the new technologies have no existing market.

The recent news that Alphabet's driverless cars will soon operate as a separate business could mean they're about ready to hit the streets, and some estimates suggest there will be as many 10 million autonomous cars by 2020. Self-driving cars and other moonshots could prove to be a boon for Alphabet, but it's early in the game to rely on them for growth.

It's a different story for Facebook, however. In addition to marketers opting for display spots, Facebook also has at least two other factors working in its favor in 2016: Instagram and virtual reality (VR). Though the decision to fully monetize Instagram was made last year, investors will begin to see in 2016 just what kind of impact it will truly have.

Opening the VR floodgates by offering the Oculus Rift headset for pre-order -- and early signs that consumers are lining up in droves -- should give Facebook yet another revenue boost as 2016 rolls on. It will take time to catch Alphabet, but 2016 will move Facebook closer to becoming an even bigger threat to unseat the king than it already is.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. 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.

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