Better ad tech stock: Alphabet vs. Meta Platforms

The digital advertising industry is growing, making it an attractive sector for investment. Digital ad spending is expected to grow 12% year over year in 2024 and continue double-digit growth through 2026.

The two companies with the largest share of digital advertising revenue in the world are Google, owned by Alphabet (GOOGL 0.75%) (GOOG 0.89%)and Facebook, owned by Meta platforms (META -0.09%). Together, their market share is 57%. Amazon it is a distant third with a share of 7%.

Alphabet and Meta’s industry leadership makes buying their stock a great way to gain exposure to the expanding digital advertising market. But if you had to choose between them, which is the better investment? Here’s a look at each to help answer that question.

Reasons to invest in Alphabet

Alphabet is a compelling investment because it has some amazing money-making weapons in its arsenal. For example, of the existing types of digital advertising, search engine advertising is the biggest cash cow, estimated to account for $307 billion of this year’s $740 billion in global digital ad spending. And among the companies competing in the space, Google is king thanks to the dominance of its namesake search engine.

As a result, Google’s advertising revenue in the second quarter totaled $48.5 billion, up from $42.6 billion in 2023. This comprised nearly 60 percent of Alphabet’s total sales of $84.7 billion.

Google isn’t Alphabet’s only source of ad revenue. The conglomerate also owns YouTube, the second largest website in the world after Google. YouTube ad sales contributed $8.7 billion to Alphabet’s coffers in Q2, up from $7.7 billion a year earlier.

YouTube is benefiting from the age-old trend of streaming services. Advertisers are shifting more ad spend from traditional television to online video sites like YouTube.

Alphabet is also leveraging investments in artificial intelligence (AI) to increase consumer use of its apps. Google’s AI-powered search results, called AI Overviews, help “increase search usage and increase user satisfaction with results,” CEO Sundar Pichai said on the Q2 earnings call.

Its massive revenues have allowed Alphabet to generate a whopping $13.5 billion in free cash flow (FCF). The company uses that FCF to invest in its AI technology and reward shareholders by buying back shares and paying a dividend of $0.20 per share.

The case for meta platforms

There are several reasons why Meta Platforms is an attractive investment, and one of them is its recent trend of strong sales. In the first half of 2024, Meta’s revenue rose 25% year-over-year to $75.5 billion. For comparison, Meta’s first-half 2023 sales rose 7% year-over-year to $60.6 billion.

Meta’s superior sales growth this year was achieved through the company’s use of AI. AI has helped the Meta family of apps, including Facebook, WhatsApp and Instagram, to increase user engagement.

For example, AI has helped the recommendation software Meta do a better job of suggesting content that its users may find interesting. Improved engagement led Meta to end Q2 with an average of 3.3 billion people actively using its apps daily, up 7% year-over-year.

More people using Meta apps means more people watching ads. Meta is paid based on how many times an ad is seen, called ad impressions, and in Q2, ad impressions were up 10% year over year. Added to this was a 10% year-over-year increase in Meta’s second-quarter price per ad, helping to drive the company’s revenue growth in 2024.

As a result, Meta’s share price has made incredible gains over the past year, jumping from a 52-week low of $279.40 last October to a high of $573.98 on September 23rd. The stock recently rose after City Group analyst Ronald Josey raised his price target on the stock to $645.

Note that Josey’s target is at the top. The current consensus among Wall Street analysts is a Buy rating on Meta stock with an average price target of $587.

Meta’s advertising sales growth contributed to Q2 free cash flow of $10.9 billion. Like Alphabet, the social media giant is using the funds to invest in AI and pay shareholders a dividend of $0.50 per share.

Choosing between Alphabet and Meta Platform stocks

With both companies generating substantial advertising revenue and investing the revenue to bolster their AI businesses, deciding which ad tech stock to invest in is no easy decision.

However, one critical factor gives Meta the edge. Alphabet is currently battling the US government in court over potential antitrust violations related to its digital advertising business. If Alphabet loses the case, it could have a significant impact on revenue, including the company being forced to divest parts of its advertising technology.

Earlier this year, Alphabet lost a separate antitrust case related to Google’s search engine dominance. The judge in that case considered this area of ​​Alphabet’s business a monopoly. However, the sanctions facing Alphabet have yet to be determined as it appeals the decision.

Meanwhile, Meta’s success using AI to grow its business and expand revenue makes it an attractive investment. But with its stock nearing an all-time high, it’s best to wait for Meta stock to drop in price before buying.