Google parent company Alphabet Inc. (GOOGL) and social media giant Facebook Inc. (FB) dominate the digital advertising space with a combined 57% hold over U.S. digital ad spend, according to eMarketer. But the two aren't equal as far as stock performance. Alphabet's shares have often lagged its Silicon Valley peer over the past fives years, rising three-fold compared to Facebook's four-fold gain. Now, that may change. Alphabet is poised to speed ahead of Facebook and the market long-term due to its wide array of fast-growing businesses, per a recent CNBC story. (See also: How the Facebook-Google Duopoly Crushes Rivals.)
Alphabet has already snuck up on Facebook in the last year, up nearly 30% over 12 months versus the latter's 2% increase and the S&P 500's 13.4% gain over the same period. In the recent quarter, Alphabet released blowout earnings, sending the stock soaring, while Facebook disappointed the Street and suffered an over $120 billion loss in market capitalization on the day following its report. While Facebook is smaller and newer than its FAANG rival, with its ad business up 42.2% year-over-year (YOY) compared to Google's 23.9% YOY ad revenue growth, investors may feel safer with Alphabet's number of popular products supporting its ad business and its focus on newer businesses with completely different business models, as noted by CNBC.
Alphabet's Diversified Businesses Paying Off
Google has seven services that each boast more than 1 billion monthly active users (MAU), including Search, Chrome, Maps, YouTube, Google Play Store, Gmail and Android. While Facebook's revenue is heavily consolidated via ads on its social platform, all of Alphabet's apps serve Google ads, while its Android operating systems works to get those ads in front of a larger number of users. By comparison, Facebook has just four services at the 1 billion user threshold, including its main app, Instagram, Messenger and WhatsApp.
Alphabet: 7 Big Businesses With 1 Billion-Plus Users Each
|Google Play Store|
In the most recent quarter, Alphabet beat the Street's expectations, driven by strength in search, YouTube and "other revenue," as well as significant gains from its outside investments. Investors were pleased with lower-than-expected traffic acquisition costs (TAC), while Google doubled capital expenditures to catch up to rivals such as Amazon.com Inc. (AMZN) and Microsoft Corp. (MSFT) in the red hot cloud computing space and other growth markets like machine learning, self-driving cars and smart speakers. "Other revenues," including non-advertising businesses such as hardware and Google Play Store, secured a 36.5% gain to $4.4 billion in revenue for the quarter.
While 86% of Alphabet's revenues came from search in the latest quarter, a growing percentage is generated from businesses such as YouTube. While the company does not break out YouTube ad revenue, analysts at Baird estimate that the on-demand video platform will generate $15 billion in revenue in 2018, as reported by CNBC. Analysts at Morgan Stanley highlighted Google Maps as the "most under-monetized" product the bank covers. Google Inc. CEO Sundar Pichai has called the navigation app a "tremendous asset," where Google is pushing more advertising.
On the other hand, while Facebook has other ambitions outside of advertising such as spreading internet connectivity and boosting augmented reality, its reach is much narrower than Alphabet's and its near-term drivers continue to rely heavily on advertising, noted CNBC.
“There has been a change in the Alphabet story. Investors have gone from being skeptical about the growth in operating expenses and capital expenditures to endorsing them now that they’re bearing fruit with strong revenue growth," wrote Evercore ISI, as cited by Barron's. The investment bank rates Google at outperform with a $1,350 price target, reflecting a 10.3% upside from Thursday morning. (See also: Why the Facebook-Google Digital Duopoly May Be Dead.)