Better AI Stocks: Alphabet vs. Meta Platforms

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Two similar businesses have different AI implications.

Technology giants the alphabet (GOOGL 1.08%) (GOOG 1.06%) And Meta platforms (Meta -0.28%) At their core, they are quite similar. Both companies dominate their respective fields by offering superior products for free. Both companies make a lot of money by selling ads that users see when they browse the platforms of both companies.

For Alphabet, the primary revenue drivers are Google Search and YouTube. For Meta, these are social media apps like Facebook, Instagram, and WhatsApp.

Both companies are investing heavily in artificial intelligence (AI) to help boost their leadership. AI seems to be the next great technological frontier to take.

But which is the best AI stock to buy? Here's what you need to know.

AI: Opportunity or Threat?

From the outside looking in, AI may seem like a shiny new topic to the average observer. But “big tech” has already been fighting AI for years. Billions of eyeballs scan the core products of Meta (social media) and Alphabet (Google and YouTube) every day. AI has long played a major role in matching advertisers with the right combination of eyeballs to maximize ad performance.

Both companies are still investing billions in AI ambitions today. Meta is spending a fortune developing several AI capabilities, from large language models to metaverses. Meanwhile, Alphabet's ambitions are in the cloud, where its Google Cloud business could grow as it works with corporations to manage their computing and AI needs.

The reality is that AI chatbots like OpenAI's ChatGPT are just the latest story in this ongoing AI battle. However, these chatbots are today's consumer-facing AI applications. Users can ask these chatbots virtually anything, and the chatbots will spit out quick answers.

For alphabets, this presents a potential problem. A search engine generates revenue by getting users to click on multiple search results (preferably those linked to advertising results). If a chatbot is going to provide the information that users are looking for without having to search through multiple possible answers, will that reduce revenue? Alphabet, of course, is adapting to AI and integrating its larger language model into Google products. However, the competition is doing the same, which could potentially suck search engine traffic from Alphabet over time.

Meanwhile, Meta's use of AI isn't necessarily at odds with its existing social media model. It enhances advertising by adding innovative tools for users. Meta has also integrated its AI chatbot capabilities into its core apps, allowing users to easily ask questions from its homepage.

When it comes to chatbots, there seems to be less of a conflict of interest between AI and Meta, giving it an advantage over Alphabet.

Financial fist a cuff

Both companies are at similar life stages. Both started dividends for the first time this year and so have massive market caps that exceed a trillion dollars.

Meta seems to have some advantages over Alphabet when you compare them head to head. For example, Meta's revenue growth rate has accelerated in recent quarters to overtake Alphabet. The company is also turning a significantly higher percentage of its revenue into free cash flow. Clearly, both companies have extremely deep pockets. Trailing 12-month cash flows for Meta and Alphabet are $49 billion and $69 billion, respectively.

META Revenue (Quarterly YoY Growth) data via YCharts. YoY = Year-over-year.

Free cash flow factors into capital expenditures, so it's after each company accounts for large-scale AI spending, primarily expanding data center capacity to support long-term AI ambitions. While Meta is growing faster and more efficiently, Alphabet is still generating a significantly higher absolute cash flow, which cannot be ignored. Such high cash generation is a competitive advantage in itself, allowing Alphabet to spend or earn more than the competition.

Which is the better deal?

Perhaps investors shouldn't be surprised that Wall Street values ​​both stocks equally. After all, they have the same business model, size, and financial performance. Meta fetched a slight premium to Alphabet, in part because analysts expect slightly higher growth than Alphabet over the long term.

META PE ratio (forward) data via YCharts. PE = Price to Earnings. EPS LT = Earnings per share long term.

Meta and Alphabet's respective price/earnings growth (PEG) ratios are just above 1, indicating that both stocks are attractive for their expected growth today. The meta is a bit cheap for its expected growth, but it's hard to call a winner here. Earnings swinging a few points one way or the other makes it a different story, so investors can easily call it a toss.

The winner is:

There is no wrong decision when comparing two such high quality companies. The truth is that both major technology companies, members of the “Magnificent Seven” stocks, are top-flight compounders that dominate their respective industries.

However, over time AI can prove to be a differentiator, and today it seems that Meta is better positioned for AI tailwinds than Alphabet, which is likely to face increased search engine demand from competitors' chatbots. Competition must be faced.

Meta also scores slightly higher than Alphabet financially, ultimately sealing the deal.

Randy Zuckerberg, former director of market development and spokeswoman for Facebook and sister of MetaPlatforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. Justin Pope has no positions in any of the stocks mentioned. The Motley Fool has positions and recommends Alphabet and Meta platforms. The Motley Fool has a Disclosure Policy.

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