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Meta Platforms vs. Alphabet: Which Technology Stock Will Reel in Investors?
Stock Analysis & Ideas

Meta Platforms vs. Alphabet: Which Technology Stock Will Reel in Investors?

The recent earnings in the technology sector have thrown us a few surprises, but the general theme of a challenging operating environment has been a constant. However, among social media stocks, while FB has taken a beating due to Q4 results that were below expectations, Snap (SNAP) and Pinterest (PINS) bucked this trend.

Meanwhile, technology giant Alphabet (GOOGL) delivered Q4 numbers that exceeded Street expectations and sent the stock soaring.

Amid this scenario, let us compare two stocks that are always in the spotlight on Wall Street, Meta Platforms and Alphabet, using the TipRanks stock comparison tool, and see what Wall Street analysts are saying about these stocks.

Meta Platforms (NASDAQ: FB)

Shares of Meta have taken a beating in the past five days, with the stock dropping by 21.2%. This fall in the stock price has been further fueled by the company’s recent Q4 results, which saw earnings drop 5% year-on-year to $3.67 per share, while net income was down 8% year-on-year to $10.3 billion.

But what caught the eye of investors was the social media company’s management admission that it was facing significant headwinds. This included increasing competition from other social media platforms like Tik Tok. Additional headwinds in the upcoming period include ad targeting and measurement problems from Apple’s (AAPL) iOS changes (expected to have an impact of $10 billion on business in 2022), regulatory changes, macroeconomic challenges such as cost inflation and supply chain disruptions, and foreign currency impact.

Apple’s iOS changes have restricted social media companies like FB’s ability to offer personalized advertising to its users, as Apple has restricted app developers’ ability to track a user’s Apple’s Identifier For Advertisers (IDFA). It did that by allowing users to opt out of sharing privacy details while downloading an app from AAPL’s app store.

Wells Fargo analyst Brian Fitzgerald acknowledged that the company is facing such a challenging operating environment for the first time since it went public. However, he thinks that FB will be able to overcome these challenges and anticipates a “multi-quarter path to recovery.”

Let us look at why the analyst believes that FB will be able to surmount these challenges. The first emerging key positive for Meta is Reels, which is also a key investment priority for the company this year.

The company’s management stated on its Q4 earnings call that Reels, its user-generated short-form video segment, is proving to “be an increasing part of how people consume content moving forward.” The company has also stated that “Reels is now our fastest-growing content format by far. It’s already the biggest contributor to engagement growth on Instagram and it’s growing very quickly on Facebook, too.”

FB is looking at simplifying video across Instagram and building more creative and monetization tools for content creators. Currently, the content monetization rate at Reels is lower than that of Instagram or Facebook’s feed and Stories, but the company expects that this will improve over time.

Fitzgerald noted another key positive for the stock – its Reality Labs business segment. Besides changing the name from Facebook to Meta Platforms, the company’s increasing focus on virtual and augmented reality wearables and products seems to be paying off.

In Q4, Reality Labs saw its revenues jump 22% year-over-year to $877 million. Analyst Fitzgerald also noted that content sales from FB’s Quest store exceeded $1 billion and the Quest app was the top app when it comes to app store rankings in the U.S. on Christmas Day. The analyst pointed out that this showed rising interest among consumers in virtual reality and the Metaverse.

Furthermore, the analyst stated that FB could stand to benefit from regulatory intervention, as there is draft legislation in the works in the U.S. and European Union (EU) that “would allow app developers to reach consumers via sideloading or alt [alternative] app stores, possibly mitigating iOS risk.”

Sideloading allows consumers to download apps by bypassing the official app store, if such an app is not available through official channels.

As a result, the analyst reiterated a Buy rating on the stock but lowered the price target from $425 to $350 (47.6% upside) on the stock.

The rest of the analysts, however, are cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 31 Buys, 10 Holds, and 1 Sell. The average Meta stock prediction of $330.35 implies upside potential of approximately 39.3% to current levels for this stock.

Alphabet (NASDAQ: GOOGL)

The tech giant’s stellar Q4 results reflected broad-based strength when it comes to spending by advertisers, as well as elevated consumer online activity. Q4 revenues soared 32% year-over-year to $75 billion.

Advertising is an important component of the company’s revenues, comprising 81.2% of the company’s total revenues in Q4. GOOGL’s advertising revenues jumped 32.5% year-over-year to $61.2 billion in Q4.

At the same time, Alphabet’s Cloud business is also quickly ramping up, as the company has made huge investments in building out the cloud-computing division. That decision has made Alphabet more competitive in the market and has diversified its revenue sources beyond its digital-ad business.

This was evident in Q4, as Google Cloud’s revenues surged 44.6% year-over-year and stood at $5.54 billion.

For the purposes of this article, we will focus more on GOOGL’s advertising revenues. The company is observing increasing momentum with YouTube, as indicated by revenues from YouTube ads, which jumped 26% year-over-year to $8.6 billion.

This growth in ad revenues for YouTube was increasingly driven by direct response and brand advertising.

What’s more, the company’s management indicated on its Q4 earnings call that YouTube Shorts (user-generated short-form videos) is seeing significant user engagement and has “hit five trillion all time views, and have over fifteen billion views each day globally. Last year, the number of YouTube channels that made at least $10,000 in revenue was up more than 40% year over year.”

Jeffries analyst Brent Thill was positive about the broad-based strength from GOOGL’s search business and “increasing contribution from mobile, YouTube and international expansion.” But the analyst did point out that Apple’s iOS changes could have had a “lingering impact” on YouTube’s ad revenues in Q4, according to his checks.

The analyst remained bullish about GOOGL with a Buy rating and raised the price target from $3,500 to $3,600 (25.6% upside) on the stock.

The rest of the analysts echo Thill, and are also bullish about GOOGL, with a Strong Buy consensus rating based on a unanimous 31 Buys. The average GOOGL stock prediction of $3,498.71 implies upside potential of approximately 22.1% to current levels for this stock.

Bottom Line

For FB and GOOGL, which generate a majority of their revenues from advertising, it is becoming obvious that user-generated content is becoming the key to ramping up these revenues.

While analysts are cautiously optimistic about FB, they are bullish about GOOGL, as it appears GOOGL is diversifying successfully from its advertising business to its cloud business.

Nevertheless, based on the upside potential over the next 12 months, Meta seems to be a better Buy.

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