Better Buy: Facebook, Inc. vs Alphabet

By Markets

Image source: Facebook.

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In the world of digital advertising, there's Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL)Google, Facebook (NASDAQ: FB), and everybody else. Google alone accounts for more than 30% of global digital advertising spending, and Facebook accounts for another 12% or so.

Investors could do well with either Facebook or Google's parent company Alphabet in their portfolios. But if you could only buy one, which should it be?

All about growth

Google is growing its revenue at a brisk pace, especially considering the Alphabet subsidiary brought in $74.5 billion in revenue last year. Revenue grew 13.5% year over year, and it's up another 19% through the first half of this year.

But Facebook's revenue growth is out of this world by comparison. The social network grew revenue 44% last year, and it's up 56% through the first half of 2016.

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That kind of growth is hard to come by for a company with as much revenue as Facebook.

Not only is Facebook growing its top line at a rapid pace, its margins are expanding, leading to even faster earnings growth. Net income increased 190% through the first six months of the year to $3.6 billion.

Alphabet's net income, by comparison, increased 22% through the first half of 2016. That's only slightly faster than its revenue growth. It's worth noting, however, that Alphabet's net income is more than 2.5 times as much as Facebook's.

Overall, analysts expect Facebook earnings per share to climb 35% per year for the next five years. Alphabet is expected to grow EPS at about half that rate, or 18%.

As such, Facebook's forward price-to-earnings ratio of 33 looks more appealing, even compared to Alphabet's 23 P/E ratio. Facebook's PEG ratio -- P/E divided by growth expectations -- is just 0.9, while Alphabet's comes to 1.2.

Facebook's path to growth is wider than Google's

Google's growth comes principally from its owned and operated properties -- mobile search results and YouTube. Mobile search benefited from its new mobile app install ads that it launched in the third quarter of 2015. As such, growth will likely slow in the second half of the year. YouTube is Google's most clear path to growth.

Facebook, comparatively, only recently opened Instagram to small business advertisers last year. Analysts have big expectations for its potential, with 500 million active users globally. Instagram could bring in $3.2 billion in revenue in its first full year of a completely open ad platform, according to Credit Suisse analysts. What's more, that revenue is expected to be incremental to Facebook's total ad revenue. Early Instagram ad budgets came out of Facebook ad budgets, cannibalizing the business, according to William Blair's Ralph Schackert.

Facebook also has several properties with huge revenue potential including its messaging apps -- Messenger and WhatsApp -- and Oculus. Oculus launched its stand-alone Rift headset this year, and management says over 1 million people use Oculus' technology on their phones with Samsung Gear VR.

Additionally, Facebook is continuously working on its search capabilities, which could represent a huge threat to Google if it launched a competing search engine. Facebook also mimicked Google by launching an ad network, allowing marketers to place ads in other developers' apps and websites. Both could be big catalysts for Facebook to continue growing.

Alphabet has a few moonshots in the works in its Other Bets segment, but its cash cow is Google. The nature of those Other Bets, however, is that they're unlikely to work out. Facebook, by comparison, already has two platforms generating billions in revenue and still growing at a ridiculous pace. On top of that, it has two more platforms with 1 billion people using each that it's yet to monetize, and it's a pioneer in what CEO Mark Zuckerberg expects to be the next big computing platform. As such, Facebook looks like a better buy than Alphabet.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.