In this analysis, we take a closer look at two prominent AI and Big Data stocks: Alphabet (GOOGL) and Meta Platforms (META). Both companies have received bullish ratings, but a deeper examination reveals a clear frontrunner.
Overview of Companies
Alphabet (GOOGL)
Alphabet, the parent company of Google, generates revenue primarily through online advertising, app sales, content on Google Play and YouTube, and fees from cloud services and licensing. Despite experiencing a 12% decline in shares over the past three months, Alphabet boasts a year-to-date gain of 20% and a total one-year return of 21%.
Meta Platforms (META)
Meta, the parent company of Facebook, Instagram, and WhatsApp, also derives most of its revenue from online advertising. Over the same three-month period, Meta’s stock has increased by 12%, achieving a remarkable 69% gain year-to-date and an impressive one-year return of 88%.
The contrasting performances of these two companies over the past three months set the stage for an interesting comparison.
Alphabet: Valuation and Future Prospects
With a price-to-earnings (P/E) ratio of 23.5x, Alphabet is viewed as undervalued. Despite concerns surrounding the potential impact of generative AI on its business model, the current P/E suggests a bullish outlook. In the most recent quarter, advertising accounted for a significant portion of Alphabet’s revenue, totaling $64.6 billion out of $84.7 billion. Google Search alone contributed $48.5 billion, underscoring the strength of this segment.
Stephen Yiu of Blue Whale Capital expressed a bearish outlook for Alphabet, citing fears of declining market share for Google Search, which has seen a drop from a 90% share. Yiu also noted that Alphabet’s AI model, Gemini, has yet to meet expectations set by competitors. However, despite these concerns, many analysts view the current P/E ratio as a buy-the-dip opportunity, especially since the stock has been trading at the lower end of its valuation range since April 2023.
Alphabet remains a strong long-term investment, having more than doubled in value over the past five years, with a rise of 174%. Analysts recommend establishing a small position now, with the potential to increase holdings if further positive developments arise, particularly regarding Gemini’s integration into Google Search.
Price Target for GOOGL
Alphabet holds a Moderate Buy consensus rating based on 25 Buys, nine Holds, and zero Sell ratings. The average stock price target of $200.29 suggests an upside potential of 21.85%.
Meta Platforms: Strengths and Challenges
Meta Platforms is currently trading at a higher P/E ratio of 30x, indicating a premium over Alphabet, although it has recently risen from a low of 25.5x in early August. While Meta has been trading within a stable range over the past year, it is now positioned in the middle of that range.
Importantly, Meta is less diversified than Alphabet, with 98% of its revenue generated from advertising as of the second quarter. This lack of diversification could be a risk if the digital advertising market faces a downturn. However, this scenario seems unlikely, given current trends.
Yiu has identified Meta as a top pick among the “Magnificent Seven” stocks, noting that it possesses superior access to personal information compared to Alphabet due to the nature of interactions across its platforms. This advantage could allow Meta to leverage generative AI for more personalized advertising, potentially driving stronger consumer engagement.
Despite Meta’s ad revenue growth rate of 22% in the second quarter—double that of Alphabet’s—it’s crucial to recognize that Alphabet operates on a much larger scale. Meta’s total revenue for Q2 was $39.1 billion, making direct comparisons somewhat complex.
Price Target for META
Meta Platforms enjoys a Strong Buy consensus rating based on 39 Buys, three Holds, and zero Sell ratings. The average stock price target of $607.92 indicates a slight downside potential of 2.54%.
Conclusion
While both Alphabet and Meta Platforms present bullish ratings, Alphabet emerges as the clearer winner in this analysis. Alphabet’s Google Cloud revenues continue to grow, surpassing $10 billion for the first time in the second quarter, positioning it well for AI revenue generation. This contrasts with Meta, which is currently trading at a premium and approaching overbought territory, as indicated by a Relative Strength Index of 69.4. Overall, while both companies are set to benefit from AI advancements, Alphabet’s attractive valuation and tangible revenue from AI initiatives give it an edge over Meta. Therefore, for investors seeking a sound investment in the AI/Big Data sector, Alphabet appears to be the more compelling choice at this time.
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