Which Stock Should You Go For: Google Or Facebook?

by Trefis Team
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Facebook’s stock (NASDAQ:FB) is up by about 16% since early 2018 – well below the 28% gain for Google’s parent Alphabet’s stock (NASDAQ:GOOG) over the same period. Interestingly, though, Facebook’s Revenues have grown by 74% between 2017 and 2019, which is nearly 1.6x the growth in Google’s revenues of roughly 46% in the same period. Also, the P/E multiple for both companies has been nearly flat since 2016, with Google’s multiple at 28.6x being lower than Facebook’s at 34.8x.

While Facebook’s higher revenue growth over recent years and its higher multiple imply higher potential earnings growth in the future, we believe that Google is the cheaper stock at present. A primary driver to our belief is a higher quality revenue mix for Google, especially Google’s Cloud business. We believe a mix of Google Cloud, its Google Suite applications, as-well-as other bets provide higher upside and more resilience to Google’s revenues.

We discuss this contrast with Facebook more below.

 

How Do The Core Businesses For Alphabet And Facebook Compare?

Let’s look at the core business prospects a bit more closely. Google has very large advertising exposure from travel, restaurants, and the broader consumer discretionary spend decline. Google’s Q1 2020 did see slower revenue growth, but the company has an advantage as businesses of all kinds, from mask sellers to restaurants, need any customers they can get – now – and this is going to come primarily online. It is possible that Google’s pay per click advertising, for which marketers only pay when their ads get results, could hold up stronger than we realize.

Facebook’s revenue from online advertising could also see some benefit as companies would try to take marketing online. However, Facebook’s overall revenue from online advertising is likely to take a hit as companies might focus on core expenses only until the pandemic situation gets clearer. This would not work in Facebook’s favor as it earns 98% of its revenue from online advertising vs. 80% of total revenues for Google. While Google’s exposure to online advertising revenues is also significant, it must be remembered that Google’s highest-growing segment in recent years – Google’s Cloud and other internet utilities – could see sizable gains due to the pandemic. The company also has a growing presence across enterprise cloud, Google Drive storage, Google suite applications: from Gmail to Chrome, and Docs, Sheets, and Slides. While many of these offerings don’t make much money yet, they provide a promising floor to our belief of Google being undervalued.

Further, Alphabet’s other bets that range from Waymo (driverless cars) to Verily and Calico (health care) to Deepmind (Artificial intelligence systems) could present an upside. To conclude, we believe Google is likely to outperform Facebook, if not near-term, at least in the medium- to long-run.

There may be another big opportunity when you compare Google to Apple.

 

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