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Better Buy: Facebook vs. Alphabet’s Google

Better Buy: Facebook vs. Alphabet’s Google

Posted On January 31, 2020 3:14 am
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Facebook (NASDAQ:FB) and Alphabet’s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google own two of the largest digital advertising platforms in the world. Facebook crafts targeted ads based on a user’s social connections, preferences, and personal data. Google does the same by mining a user’s search, location, and browsing histories.

Both companies offer lucrative ad products, yet both are being scrutinized by regulators and privacy advocates. Both companies dealt with multibillion-dollar fines over the past year, and both faced protests from employees over their business practices. But despite those challenges, shares of Facebook and Alphabet have nearly tripled over the past five years as their ecosystems expanded and their revenues rose. Will those gains continue in 2020 and beyond?

How do Facebook and Alphabet make money?

Facebook generated nearly 99% of its revenue from ads in 2019. The remaining sliver came from sales of hardware devices (like the Portal smart screen and Oculus VR headset) and other services.

Alphabet generated 84% of its revenue from Google’s advertising business in the first nine months of 2019. Nearly 16% came from Google’s other businesses, including cloud services and hardware devices. Less than 1% came from “other bets” like its driverless and healthcare divisions.

Which company is growing faster?

Facebook’s revenue growth decelerated at a much steeper rate than Alphabet’s over the past five years:

Revenue growth FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
Facebook 44% 54% 47% 37% 27%
Alphabet 14% 20% 23% 23% 19%*

SOURCE: COMPANY QUARTERLY REPORTS. *CONSENSUS ESTIMATE.

Facebook’s slowdown occurred for several reasons. First, it was saturating developed markets like the U.S., Canada, and Europe, which generated significantly higher revenue per user than less developed regions. Second, a series of privacy, security, and fake news debacles spooked users across multiple markets and forced Facebook to throttle its own ad growth.

Meanwhile, Facebook struggled to retain younger users as they flocked to Snap‘s Snapchat and ByteDance’s TikTok. Facebook’s Instagram retained many of those younger users, but the company’s tightening grip on the platform could throttle its growth. Wall Street expects Facebook’s revenue to grow just 22% next year.

Alphabet made several mistakes in recent years, including lackluster efforts in the cloud market and failed products like Google+, Daydream, and myriad messaging services. It also faced the removal of pre-installed apps on Android devices in Europe, and the trade war threatened to sever its relationship with Chinese tech giant Huawei.

Yet Google’s core search engine continued to lock in advertisers, and the company faced slightly less regulatory scrutiny than Facebook in the U.S. Analysts expect Alphabet’s revenue to rise 18% next year.

Which company is more profitable?

Facebook and Alphabet both generated volatile earnings growth over the past five years, due to ecosystem investments, regulatory fines, and tax law changes:

EPS growth FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
Facebook 29% 171% 54% 40% (15%)
Alphabet 15% 23% (35%) 142% 6%*

SOURCE: COMPANY QUARTERLY REPORTS. *CONSENSUS ESTIMATE.

Facebook’s earnings decline in 2019 was attributed to higher investments in data centers, an expansion of its workforce, investments in new projects, and legal expenses related to lawsuits and probes. However, analysts expect its earnings to rebound 43% next year as it moves past those near-term issues, which is a decent growth rate for a stock that trades at 24 times forward earnings.

Alphabet’s earnings growth is expected to decelerate in 2019 as it plows more cash into data centers, expands its workforce, and beefs up its efforts in the crowded cloud, AI, and video streaming markets. It agreed to acquire Fitbit last November, and it will likely buy additional companies to expand its sprawling ecosystem.

Analysts expect Alphabet’s earnings to rise 17% next year as its core search engine keeps generating high-margin revenue. That’s a decent growth rate, but it’s a bit lower than its forward P/E of 27 — which suggests that the stock’s upside could be limited.

The winner: Facebook

Facebook and Alphabet are both solid long-term investments, but the social networking company has more irons in the fire than the world’s top search engine.

The growth of its namesake platform is slowing, but…

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