Facebook and Alphabet (Google) are the world’s two leading digital advertising platforms, and both generate an extraordinary amount of revenue. So which is the better investment right now?

Facebook had a terrible year in 2018 amid concerns over user privacy and slowing user growth. Its share price remains 25% below its all-time high, despite already rallying 35% from its 2018 low. Alphabet meanwhile is trading just 10% below its all-time high, having risen 20% from its 2018 low.

In terms of valuation, Facebook is slightly cheaper overall. But, for these companies, valuation is almost irrelevant. It will be their ability to grow earnings and revenue that will drive their stock prices. What really counts, is how and when they will be able to grow their revenues.

 

Facebook – Room for Revenue Growth Regardless of User Growth

While there are significant political concerns around “Big Tech” regulation, those concerns haven’t stopped many people using the platform. The bigger concern is that user growth is tapering off, and earnings growth will continue to slow.

However, Facebook still has several potential revenue sources it has barely tapped into. For a start, part of the slowdown in revenue growth is a result of the company transitioning advertising from posts to stories. This is hurting growth in the short term but in the longer term should drive engagement and therefore ad revenue.

Furthermore, Facebook has barely started monetizing Instagram, Messenger, and WhatsApp. Revenue from these products is likely to accelerate in the next few years. E-commerce is another area that will drive revenue growth in the next few years. With as many as 2.7 billion users, Facebook’s e-commerce potential may be an untapped gold mine.

In addition to the above, there is still potential for user growth to surprise on the upside. Internet penetration and smartphone use are still growing, and Facebook still has untapped markets to penetrate.

 

Google – Blue Sky Potential

Google’s growth has also slowed, as its main source of revenue, advertising, has slowed substantially. But what Google really has going for it is a more diversified portfolio of businesses, many of them with blue sky potential.

Google’s ad revenue growth has slowed, but it still hasn’t properly tapped into mobile advertising – if, or when that happens ad revenue growth may accelerate again.

Non-advertising revenue accounts for about 15% of total revenue, but with faster growth, that share will increase. Non-ad revenue could also accelerate in the longer term given some of the projects in the pipeline.

First, Google’s cloud business is now the third largest in the world and growing rapidly. The Play Store is now a big business – in 2018 it sold apps and subscriptions worth over $24 billion, of which it earns 30%. With the addition of new subscription services, this revenue is likely to grow.

Google’s smartphone brand Pixel makes up a tiny share of its revenue – but it does have a loyal following, and there is a chance it could become a serious brand in the future.

Waymo, Alphabet’s autonomous driving technology, is now the leading contender to become the go-to operating system for driverless cars and will give the company a first-mover advantage in many areas related to autonomous vehicles.

We can also add smart home devices, other IoT devices, and gaming to the list of new Google businesses. And with nearly $100 billion in cash, the company is also in a position to make acquisitions if needed.

 

Pick Your Time Horizon

When we consider everything on the horizon for Facebook and Alphabet, two themes emerge. Facebook has a few very promising options available to increase revenue growth again quite soon, even if user growth continues to slow. Probably not this year, but in 2020 and 2021 we should see earnings accelerate again.

Alphabet, on the other hand, has very exciting projects in the pipeline, but they will probably take longer to monetize. Alphabet is also building a more diversified business, which will be less dependent on advertising. Finally, several of its newer businesses have the potential to be massive businesses in their own right.

Barring significant developments on “Big Tech” regulation from the U.S. government, on a one to two-year view, Facebook may be the better play. However, beyond that Alphabet has far more going for it.