Better Buy: Meta vs. Alphabet
February 27, 2023
Facebook and Google are two of the most recognisable brands in the world.
That’s because consumers use Facebook to connect with their friends while Google is the most visited website and dominates the search engine market.
However, despite their brand power, Meta Platforms Inc (NASDAQ: META) and Alphabet Inc (NASDAQ: GOOG), the parent companies of Facebook and Google respectively, have seen their share prices decline by 19.1% and 33.6%.
This is mainly due to the rising interest rate environment and the weakness seen in the advertising market, which hurt both Meta and Alphabet.
No doubt that’s down to the fact that both Meta and Alphabet’s business models have a strong reliance on advertising revenue.
As an investor, deciding which of these companies to invest in can be a challenging task, especially given the current environment.
In this article, I’ll do a quick comparison between both Meta and Alphabet to help you make an informed investment decision on which stock is the better buy.
Broad advertising weakness
Advertising is sensitive to the economy and, with a potential recession on the horizon following sharp increases in interest rates, we have seen a slowdown in the advertising industry.
Meta’s revenue declined 4% year-on-year (yoy) while Alphabet only managed to grow its revenue by 1% yoy.
Despite the weakness in earnings, it is worth noting that Meta managed to grow its daily active users on its platforms (Facebook, Instagram and WhatsApp) by 5% to 2.96 billion.
Meanwhile, both Google and YouTube remain the runaway leaders in global traffic, which will benefit Alphabet when the market environment improves.
I will call it a draw for this one since both Alphabet and Meta have their own strength and target to maintain to maintain their dominance in the digital advertising space.
Winner: It’s a draw
Growth prospects and risks
Both companies have a strong growth track record, as seen from their revenue and earnings growth.
For Meta, the company has been investing into its new business, Reality Labs, which focuses on immersive experiences like augmented and virtual reality (VR).
It is still too early to expect this business venture to be commercially viable given the uncertain prospects of the Metaverse. In fact, investors are concerned about the amount of losses in its new business.
In Q4 FY2022, Meta’s Reality Labs unit recorded a US$4.28 billion operating loss, bringing its total loss for FY2022 to S$13.72 billion.
Aside from that, Meta is also looking to introduce a subscription business model with new Instagram and Facebook verification subscriptions. Researchers estimate that this might bring in about US$2 billion in revenue for Meta.
Meanwhile, for Alphabet, the growth prospects are likely to be driven by its Google Cloud and Google Workspace divisions.
There is, however, a risk for its search engine as the new wave of chat bots – like ChatGPT – that use artificial intelligence (AI) are seen as a threat that could surpass Google as the world’s number one search engine.
On this front, I think Google’s Alphabet is in a better position as the risks from the new wave of chat bots is unlikely to hurt their earnings immediately.
Meanwhile, Meta’s investment into Reality Labs will continue to drag the company into the red for a while longer at least.
When comparing stock investments, valuation is crucial. Meta’s current trailing price-to-earnings ratio (PE) is around 15.5 times, while Alphabet’s trailing PE ratio is approximately 18.4 times.
However, analysts are expecting Meta’s earning per share (EPS) to grow around 10% annually over the next three to five years, lower than Alphabet’s average growth of 12%.
Those are very similar numbers but looking at both the valuation and growth, Alphabet seems to win on this one.
Neither Meta nor Alphabet pays dividends to shareholders. Both companies prefer to reinvest their profits into the business to drive growth and innovation.
However, both Meta and Alphabet love buying back shares.
In fact, Meta recently announced a new US$40 billion share repurchase programme, on top of the roughly US$11 billion it has left from the previous programme.
Alphabet spent more than twice as much as Meta over the past year on share repurchases. The company also has a strong balance sheet with US$113 billion in cash and cash equivalents, that allows the company to afford share buybacks.
Alphabet generated nearly three times more than Meta in terms of cash flow over the past year.
Based on this, Alphabet is the clear winner.
Alphabet’s deep pockets and business offers more safety than Meta
Overall, both Meta and Google are excellent investment options for long-term investors.
Alphabet has a few advantages, especially when seen from the risk, dividend and valuation perspective.
With its enormous cash pile, Alphabet could fund both aggressive share repurchases and continue to invest in long-term growth projects.
Meanwhile, Meta’s massive losses from Reality Labs is a concern.
Unless Meta’s Reality Labs can reach out to the global market, Alphabet is definitely the better buy when compared to Meta.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.