Better Advertising Tech Stock: Alphabet vs. Meta Platforms

The digital advertising industry is growing, which makes it an attractive sector to invest in. Spending on digital ads is expected to increase 12% year over year in 2024, and continue double-digit growth through at least 2026.

The two businesses with the largest share of digital advertising revenue in the world are Google, owned by Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), and Facebook, owned by Meta Platforms (NASDAQ: META). Together, their market share is 57%. Amazon is a distant third with a 7% share.

Alphabet and Meta's industry leadership makes buying their stocks a great way to gain exposure to the expanding digital ad market. But if you had to choose between them, which one 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 possesses some stupendous moneymaking weapons in its arsenal. For instance, among the existing types of digital ads, advertising on search engines is the largest cash cow, projected 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 second-quarter advertising revenue totaled $48.5 billion, up from $42.6 billion in 2023. This comprised nearly 60% of Alphabet's $84.7 billion in total Q2 sales.

Google isn't Alphabet's only source of ad revenue. The conglomerate also owns YouTube, the second-largest website in the world behind Google. YouTube's ad sales contributed $8.7 billion to Alphabet's coffers in Q2, an increase from $7.7 billion in the previous year.

YouTube is benefiting from the secular trend of streaming services. Advertisers are shifting more ad spending away from traditional television and onto online video sites such as YouTube.

Alphabet is also leveraging investments in artificial intelligence (AI) to increase consumer usage of its apps. Google's AI-generated search results, labeled AI Overviews, are contributing to "increases in search usage and increased user satisfaction with the results," CEO Sundar Pichai said on the Q2 earnings call.

Its massive income enabled Alphabet to generate a whopping $13.5 billion in Q2 free cash flow (FCF). The company is using that FCF to invest in its AI tech, and to reward shareholders by repurchasing stock and paying a $0.20-per-share dividend.

The case for Meta Platforms

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

Meta's superior sales growth this year was achieved by the company's use of AI. AI assisted Meta's family of apps, including Facebook, WhatsApp, and Instagram, to boost engagement among users.

For instance, AI helped Meta's recommendation software do a better job suggesting content its users may find interesting. The improved engagement resulted in Meta ending Q2 with an average of 3.3 billion people actively using its apps daily, a 7% year-over-year increase.

More people using Meta's apps means more eyeballs viewing ads. Meta is paid on how many times an ad is seen, called ad impressions, and in Q2, ad impressions rose 10% over the prior year. Adding to this was a 10% year-over-year increase in Meta's Q2 price per ad, helping to fuel the company's 2024 revenue growth.

Consequently, Meta's share price saw incredible gains this past year, jumping from a 52-week low of $279.40 last October to hit a high of $573.98 on Sept. 23. The stock rose recently after Citigroup analyst Ronald Josey boosted his share price target to $645.

Note that Josey's target is on the high end. The current consensus among Wall Street analysts is a buy rating for Meta stock with a median 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 to pay shareholders a dividend of $0.50 per share.

Choosing between Alphabet and Meta Platforms stock

With both companies generating substantial advertising revenue, and investing the income to strengthen their businesses with AI, deciding which advertising tech stock to invest in is not an easy decision.

However, one critical factor gives the edge to Meta. Alphabet is currently battling the U.S. government in court for potential antitrust violations related to its digital advertising business. If Alphabet loses the case, it could have a significant revenue impact, 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 deemed this area of Alphabet's business a monopoly. However, the penalties Alphabet faces are yet to be determined as it appeals the decision.

Meanwhile, Meta's success using AI to grow its business, and expand revenue, make it an appealing investment. But with its stock hovering near an all-time high, it's best to wait for Meta shares to dip in price before buying.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, and Meta Platforms. The Motley Fool has a disclosure policy.