- Meta Platforms has outperformed the S&P 500 massively, due to cost-cutting and a growing activity on the family of apps.
- Alphabet got hit badly and is underperforming, due to the release of ChatGPT.
- There is one clear winner, which is ready to dominate the next decade.
At the end of last year, I wrote an article for both Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META) with respectively a Strong Buy and a Buy rating. Since then, both companies have been prioritizing on efficiency and trying to scale back on their over hired employees. Yet, Meta has been way more efficient and quicker in scaling back. In Q4, Meta had already decreased their headcount, while Alphabet on the other hand was still growing headcount. Meta’s actions got rewarded immensely and outperformed the S&P 500 by more than 60% since my last article. Although Alphabet saw a decent recovery from January’s lows, ChatGPT threw the stock under the bus.
Fundamentals Create Price Action
One of the most important things in investing is revisiting your thesis, especially after a large move in stock price, change in fundamentals or additional risks. Therefore, Alphabet and Meta both need a re-evaluation as respectively an additional risk has joined the Chat and a substantial rise in stock price happened.
Interestingly, Meta’s price-to-earnings ratio has risen at a fast pace from 10 to 20 over the last months and has rejoined Alphabet. Both are now priced evenly, which makes it easier to decide which one we prefer to own.
The advertising market has seen some hiccups, as a result the profit margin of the two giants has decreased significantly. It is notable that Alphabet has held up better in profitability compared to Meta and is still really close to the average profit margin of the last 10 years.
Back in November, Meta’s free cash flow yield was at a stunningly 8.58% and extremely discounted towards the other big tech names. Now the story has turned upside down, Alphabet is dominating free cash flow yield over all of big tech.
Risk Vs. Reward
Meta won back bullish investor sentiment by cutting costs and by not losing attention of their strong core business. The stock was absurdly low priced compared to the cash cow it is. In Q4, the company showed investors it can keep growing the family of apps monthly active people. Although in America and Europe growth is stagnant, emerging countries in Asia (Vietnam, India,…) and South-America should not be forgotten. Lot of those countries have yet to see a digitalization boom.
However, as value investors, the stock price is much less interesting, than it was in November. The fundamentals are now closer to fair value and spending is high in an unprofitable metaverse business. At this point, the outcome of the metaverse spending has become increasingly more important to take in mind. Therefore, the risk vs reward balance is now relatively neutral for me.
On the other hand, Alphabet got a possible new competitor in the search engine battle. Microsoft is after market share with a combined engine of Bing and ChatGPT. ChatGPT is the brand new AI, that seems to know all answers and can bring it to you in a conversational interaction. People were in love on first sight. Nevertheless, Investors of Alphabet were not so happy. The stock price took some serious hits, which makes it interesting for value investors, since so far the fundamentals haven’t changed.
It is good to know that this is not the first time, that Bing aka Microsoft has tried to get into the search engine competition. Partnerships with Yahoo! and Facebook did not make it successful and Google kept a powerful position.
Next to that Investors seem to forget the investments Alphabet has done over the past years. Alphabet was one of the first companies to invest in AI. Back in 2014, the company spent $10 million on Dark Blue Labs & Vision Factory, which is now integrated in DeepMind. Further, Alphabet has its own conversational AI bot named LaMDA, which is built on the Transformer neural network architecture. Transformer was invented by Google Research and has also helped building ChatGPT. Google gains more data than any other company and should easily replicate ChatGPT with Bard (based on LaMDA).
For me, Alphabet is the clear choice to invest my money right now. I have trimmed my Meta position by 50% on the 3th of February. On the other hand, I have been buying more shares of Alphabet. Currently, I hold a 10.3% allocation in Alphabet and 2.3% allocation in Meta.
Alphabet offers me less risks and similar if not better rewards going forward. The company is not behind in the AI game and has a strong position going forward. Of course, it will always be difficult to stay on top of the game, nonetheless Alphabet’s investments has been in the right sectors.
The company’s balance sheet is sitting on $113 billion in cash and short term investments. This gives more than enough options for future investments and buying back shares at these prices. In addition, two notable investors, Li Lu and Seth Klarman have increased their stake in Alphabet by respectively 168% and 190%. The PE of 20 is rather low compared to the average of the last years, so the bearish sentiment offers a great opportunity in one of the strongest moat businesses in the world.
I remain my Strong Buy rating for Alphabet and downgrade Meta to a Hold.
Disclosure: I/we have a beneficial long position in the shares of GOOG, META either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a financial advisor. Investing is your own responsibility. I am not accountable for any of your losses.