Investors can compare the Google and Facebook parent companies on key metrics, but the choice quickly becomes ‘extraordinarily subjective.’
The face-off
Elon Musk and Mark Zuckerberg have been wasting our time lately with talk of a cage fight. This Financial Face-off tackles a more relevant battle between two tech giants. The question: Which big tech stock is a better buy for investors, Meta Platforms (formerly known as Facebook, where Zuckerberg is CEO) or Alphabet, the company that owns Google?
Why it matters
From hastily Googling a dinner recipe on your commute home, to shopping for office attire on Facebook-owned Instagram, there’s no question that for many of us, these two tech companies are enmeshed in our daily lives. Maybe you’ve heard that you should “invest in what you know” and thought you should look into owning a piece of Meta or Alphabet. (For the record, the fund manager credited with coining “invest in what you know” says his advice has been widely misinterpreted.) Maybe you’ve heard that Meta and Alphabet are among the so-called Magnificent Seven companies that have led a rally in tech stocks this year, and you want to know if you should get in on this action.
How to compare stocks and decide which one is a better buy
Your Financial Face-off columnist talked to two experts about how they would approach this comparison. I asked them how a novice investor should look at this question.
I learned that there’s no one right way to analyze stocks. It’s a mix of data-crunching and informed prognostication — with a dash of gut feeling.
“It’s tricky comparing them,” said Steve Sosnick, chief strategist at Interactive Brokers, an online investment trading platform. “It’s very different than comparing, let’s say, Exxon to Chevron or Ford to GM.” That’s because Meta and Alphabet are considered high-growth companies, while Exxon, Chevron, Ford and General Motors are considered value stocks. Growth stocks generally offer the potential for higher returns, but can be riskier to invest in because they are more volatile. Value stocks typically deliver consistent, but more modest returns. Meta and Alphabet are labeled high-growth partly because “they’ve been turbo-charged by AI enthusiasm and by how AI might affect their business,” Sosnick said. But picking which companies will be the winners and losers as AI emerges quickly becomes “extraordinarily subjective,” he said.
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‘The best AI company may not exist yet’
The rise of the internet in the 1990s and early 2000s was a similar moment. It was as life-changing as everybody thought it would be, and perhaps more so, but that didn’t mean everyone made money investing in internet stocks, because the early winners weren’t necessarily the ultimate winners, Sosnick said. “Netscape and AOL were the two companies you had to be in,” Sosnick said. “Facebook and Google didn’t exist. The best AI company may not exist right now.”
Then there’s the question of whether these companies’ earnings are stable and can be replicated. When considering this, investors need to weigh factors outside their control. With Exxon and Chevron, that would be the price of oil. With Meta and Alphabet, one of those X factors is AI. “As unknowable as the price of oil is at any given time, it’s really unknowable what the ramifications of AI will be both on society, and on these particular companies,” Sosnick said. “It’s difficult to value something that is both so futuristic and something that is so intangible.”
Metrics for measuring stocks
But, there are, of course, plenty of tangibles investors can use to evaluate companies. One of the most common and simple ways is to look at a stock’s price-to-earnings ratio, or P/E ratio. The P/E ratio “gives investors a way to see what they’re paying for each $1 on a company’s bottom line,” wrote MarketWatch deputy investing and corporate news editor Tomi Kilgore in this helpful guide on how to use MarketWatch’s stock quote pages to research stocks. Meta’s quote page is here and Alphabet’s are here and here.)
The higher the P/E, the more expensive a stock is considered to be, while a lower P/E means a stock is considered a better buy. The S&P 500 was trading at a forward P/E (meaning the P/E based on expected earnings, not past earnings) of 19.5 on July 14; Alphabet’s Class A shares had a forward P/E of 21, Meta’s was 23, according to FactSet.
‘It’s really unknowable what the ramifications of AI will be both on society, and on these particular companies.’
— Steve Sosnick, chief strategist at Interactive Brokers
Investors making a basic comparison between two value stocks might also look at numbers such as the dividend yield, Sosnick said, but in the case of Alphabet and Meta, dividend yields are not a factor, because growth companies don’t typically pay dividends.
Sosnick is also a fan of looking at a stock’s PEG ratio, which is a stock’s P/E ratio divided by the projected growth of its earnings. Stocks with lower PEG ratio can be considered better buys.
Meta’s and Alphabet’s P/E and PEG ratios stacked up pretty evenly in mid-June when MarketWatch talked to Sosnick. That was before Meta rolled out its “Twitter killer” social-media platform Threads, and before some analysts started voicing concerns about the impact of AI on Google’s search-ad business.
In cases where neither stock seems particularly expensive or cheap relative to the other, Sosnick said, “It really comes down to, who do you like better?” Investors need to ask themselves, “Whose vision of the future is better, and who is more likely to realize it, and who is more likely to profit from it? And who is more likely to get competition that could knock them off their perch?” In other words, if you want to invest in Meta, you have to believe in Mark Zuckerberg, Sosnick said.
‘You’re trying to anticipate how well a company will do’
Likewise, Dave Heger, a senior equity analyst with Edward Jones, also saw similarities between the companies’ metrics when he spoke to MarketWatch in mid-June. Heger evaluates stocks and writes opinion reports, rating a stock as either a “buy” or a “hold.” Heger had rated both Meta and Alphabet as “buy” when we talked. Financial advisers at Edward Jones then use his opinions when discussing possible investments with their clients.
Heger uses what’s called the “mosaic theory” to research a stock, taking pieces of information from several sources and putting them together to form a picture of a company. He’ll do this in part by talking to people inside a company, such as the chief financial officer, investor relations representatives or even the chief executive officer. Analysts also glean information by looking at data from independent sources on trends in a particular industry and by reading news articles.
One of the first things analysts like Heger do is to project a company’s revenue, expenses and earnings, to help determine what a stock should be worth. “The market in general is always forward-looking and you’re trying to anticipate how well a company will do, and price the stock based on those expectations,” Heger said. For both Alphabet and Meta, Heger has models that show quarter-by-quarter what the company’s results could be over the next two years, and even further out.
Based on his research, Heger gave your Financial Face-off columnist a quick sketch of each company’s business model, revenue sources and the risks they face from competitors and other sources.
Both Alphabet and Meta make most of their revenue from online advertising, he said. At Alphabet this is mostly search advertising, or ads that show up in Google search results. Google also makes money from the advertising on YouTube, which it owns, and by providing technology that helps other companies place ads on websites. Its other revenue sources include cloud computing, Google TV, its Android operating system and selling actual cell phones. While Google is dominant in search, it faces competition from the likes of Amazon and Target, whose websites people use as search engines when shopping for products, Heger noted.
Meta’s online advertising revenue comes mostly from its social-media sites: Facebook, Instagram, and Threads. The company also owns the messaging service WhatsApp. Another smaller part of Meta’s business is Reality Labs, where it’s trying to develop metaverse technology.
“In a nutshell how I would sum it up for Alphabet is that they’re a fairly diversified company in terms of how they generate revenue,” Heger said. “For some investors that may be appealing that you don’t have all your eggs in one basket.”
The verdict
My highly subjective personal take: Alphabet.
My reasons
Because these stocks line up similarly on basic metrics, I went with my gut. I chose Alphabet because its search tool feels like an indispensable part of daily life. Google is a verb that most of the world understands. Facebook, Instagram and Threads are forums we choose to visit when we want to, but Google functions more like a utility that we need. And it doesn’t come with the negative mental-health side effects of social media. I have no desire to follow the people behind Facebook and Instagram into the metaverse. Then again, Xerox was once a verb that meant to copy a piece of paper, but when was the last time you did that?
Is my verdict best for you?
On the other hand, why are you even looking at Meta vs. Alphabet, as in, why are you interested in buying individual stocks? Investors picking and trading individual stocks rarely beat the market. Instead of buying one of these stocks, you could get a piece of the Magnificent Seven with less risk by investing in an ETF, mutual fund or index fund that will let you own pieces of several different companies. Invesco’s QQQ exchange-traded fund, which tracks the Nasdaq-100 index, would accomplish this.
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