Better Buy: Alphabet or Facebook?
In this post we are going to evaluate, using a few comparative metrics, whether Facebook or Alphabet (Google’s parent) stock looks like a better buy at the moment. Both digital ad giants just posted Q4 and fiscal 2018 earnings. Facebook stock jumped 10% on positive looking numbers, while Alphabet’s shares dropped 3% after posting earnings after the bell today.
Q4 Earnings Comparison
When comparing two companies, it is important to look at different metrics from the earnings releases.
Fourth Quarter Earning Metrics (in millions) Metric (Y/Y growth)GoogleFacebookRevenue$39,276 (24%)$16,914 (30%)Costs and Expenses$31,073 (26%)$9,094 (62%)Operating Margin21% (-3%)46% (-9%)Earnings Per Share$12.77 (N/A)*$2.38 (65%)
*EPS in Q4 was negative because of a one-time expense, so the growth rate is hard to calculate.
Facebook gets the edge in revenue growth, but has a concerning 62% growth rate in expenses that is hurting its operating margin at an alarming rate. This occurred because the company has had to hire thousands of employees to monitor the site for fake accounts and/or news activity in the wake of the recent political scandals on the platform.
Even with some of these numbers trending in the wrong direction, Facebook still takes the cake in the operating margin and revenue growth categories.
Valuation GoogleFacebookMarket Cap$790 billion$483 billionPrice-to-earnings (P/E)42.522.36Dividend YieldN/AN/AForward P/E24.0222.93
*Data source: Yahoo Finance
Both corporations are extremely large, and have ridden the network affects of digital advertising to create what some would call an industry duopoly. There’s a reason no digital advertising start-ups exist, because the entire market is now owned by two companies.
The forward P/E’s are the most telling when looking at the valuations. Analysts are actually expecting Facebook to have a higher P/E in 2019 than 2018, which is never a good thing for a stock. Google’s trailing P/E is all the way up to 42.5 because of some one-time expenses in 2018, but analysts are expecting the P/E to almost be cut in half in 2019.
It is also important to note that P/E is never the be-all-end-all for a stock. Future growth opportunities and profitability headwinds and tailwinds also need to be taken into consideration.
Future Growth
For Facebook, the biggest growth-drivers will be WhatsApp and Instagram. The core Facebook platform is fairly saturated and has been losing popularity, especially among young people. What is concerning, especially when thinking about possible regulation coming down the pipeline, is that Facebook gets 97% of its revenue from advertisements. The profitability of these ads could be hurt by any regulation to Facebook’s data gathering practices, and would crush the company financially.
After the core businesses, which include search, Adsense, and YouTube, Google has a pipeline for future growth in what they call “Other Bets.” One of these bets includes Waymo, a self-driving technology company that should start pumping-out profits in the 2020’s. Another huge bet that paid off was their investment in voice-technology, as they are one of the two big players with Amazon in this high growth industry.
Overall, I think Google is a better buy here, mainly because I see them growing revenues faster and for a longer period, especially with a high likelihood of government regulation on Facebook’s properties. If you look strictly at earnings, Facebook is the clear winner with better current sales growth and operating margin. However, earnings never are or will be the entire story, and is why I believe Google is a better company to own from here on out.
Disclosure: The author may have interest in the companies talked about.