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Google and Facebook are stocks on very high P/E ratios in the 30s, but with excellent near-term growth catalysts this can come down to the low 20s over the next few years. They also are having a daily impact on most of our lives making them a fascinating comparison story, so let’s get to it.
Google Vs Facebook – Growth Prospects
The main profit driver from Google is still undoubtedly their search engine, which is estimated to dominate more than 60% of that market. Even assuming market share doesn’t significantly increase here, overall internet usage will climb and continue to deliver them powerful analytics to improve their ad effectiveness.
You can access the latest Google earnings call on YouTube, which I recommend checking out to obtain a greater insight into the company’s vision.
It is here that you can get a sense of the powerful growth prospects of YouTube. They have over 1.5 billion mobile users that average over 60 minutes a day of viewing. Outside of the mobile YouTube experience though; YouTube TV grew by 70% over the last year. The company is very optimistic about subscription revenue streams like this. YouTube red is another example, which allows ad-free viewing.
Promising Long Term Growth
Assessing the potential further monetization of existing services is a key to forecasting the long-term growth prospects of these companies. YouTube has had good feedback with their six second ads from advertisers. Further monetization in this area combined with continued strong user growth is a powerful force on future profit forecasts.
Artificial intelligence is another area that Google is excited by, seeing great potential to assist business productivity. They also see the average person’s home as a great target market, with their innovative Google Home products. The huge scale of the company enables them to invest heavily in such areas. It gives shareholders a chance to ride on the next potential waves of technology improvements.
Google Stock in 2017
Getting back to monetization of existing services, Facebook has done a superb job in lifting the overall average revenue per user (ARPU) over recent years as can be seen below.
Observing this graphic, it does appear like Facebook has plenty of room to boost ARPU outside of the US & Canada. This provides a tailwind, but I don’t expect countries with lower GDP per capita to get near the ARPU in parts of the developed world.
I expect the growth rates in ARPU to soon peak out with the US & Canada, but Europe and Asia still have great potential in this respect. Easier revenue growth can come from simply getting more users on board. Asia also stands out as a great growth prospect with their relatively lower rate of internet penetration.
Challenge: Monetizing WhatsApp & Instagram
A huge amount of traffic is on their messaging apps in Messenger and WhatsApp, and monetizing these will eventually provide a great boost to profits. Instagram is experiencing stronger growth than Facebook recently in terms of new users, it being particularly appealing to the younger generation. We are seeing more ads appear, so this in the sweet spot in monetization. More ads can act as a tailwind while new users are growing strongly. Like how I described YouTube earlier, they have room to increase the amounts of ads and deliver on the effectiveness of such ads for advertisers.
Over the next few years, I think Facebook has the edge in terms of growth prospects, given the untapped potential of the messaging apps and further monetization of Instagram. In the longer term though growth prospects will more revolve around the extent of moat the companies have.
Facebook Stock in 2017
Google Vs Facebook – The Future Plans
Google’s search engine and YouTube both thrive on user’s desires to go to the platform that is more likely to provide the answers from our search results that we are looking for.
Facebook users don’t want to leave for fearing isolation with their network of friends. I have no doubts as to the strong moat characteristics of this argument. Where I have less certainty though is to the growth in how engaged users are to the platform. The success of Instagram and WhatsApp indicates a preference by some to interact with contacts where there is less ad clutter or maybe to interact with smaller groups of friends.
Facebook owns these two, so this is not a great concern in the shorter term. Yet what is the end game for them if users are happy to drift on to other social media networks with some of their friends?
Does Facebook become more of a reference point to visit less frequently to keep a check of a wider network of friends?
Will this placed pressure on ARPU growth in the longer term, and require more acquisitions of rivals in the future?
Both companies have grown so much in recent times that they are considered a duopoly in the global online advertising market. The below graphic illustrates that Google has a far greater presence overall.
Rather than seeing this being a strength, it highlights an area of risk for both companies. The larger you are the more likely you will come under the scrutiny of regulators. Google found this out with a $2.7 billion fine in Europe this year for abusing their dominant position.
Facebook is also still huge and has their concerns. Rarely a day goes by without an article speculating that Facebook is overstepping the mark in collecting personal data from users. This is a strength of Facebook as it enables them to tailor their ads better. Yet it could one-day act as a double edge sword if they pursue this too aggressively. They are also often targeted on bigger picture issues, such as potentially harming the social fabric of society, which can be unnerving for a shareholder.
I would be cautious about buying both companies, as history suggests simply size can be a catalyst for profit growth to revert to the mean. I am also wary of being prone to over estimating the moat a large company may enjoy. Both have great potential to achieve fantastic earnings growth over the next few years, but it is on the respective moats that I have more comfort in Google.
There is only so much time in the day to devote to some of these company’s services, and I suspect Google stands a better chance to hold on to our time. I also see Facebook as more of a target from being criticised from regulators on a wide variety of issues, but particularly surrounding the issue of privacy.
Therefore, it is more the potential downside scenarios that could affect either stock that would lead me to suggest Google would be the better company to own from this point.