Meta vs. Alphabet: Wall Street favors one over the other. Our view is not so black and white

Published Tue, Jun 27 20233:41 PM EDT

Wall Street analysts continued to favor Meta Platforms (META) over Alphabet (GOOGL), sending shares of META up more than 3% and GOOGL shares just slightly higher Tuesday. We understand the current desire to call out something of a pair trade — selling Alphabet and buying Meta Platforms — on the part of analysts that cater to clients with shorter investment horizons. Since we have a longer investment horizon at the Club, we see room in our portfolio for both stocks at the moment. One day after UBS raised its price target on META, Citi on Tuesday increased its price target on the stock to $360 per share from $315 and kept its buy rating. Bernstein late Monday downgraded GOOGL to market perform from outperform (to hold from buy) with a $125 price target. UBS downgraded the stock early Monday but raised its PT. The case for META over GOOGL has been on display in this year's tech-driven rally. The Facebook owner has jumped nearly 140% in 2023. The Google parent has only risen nearly 35%. While most investors would have been overjoyed by either of those returns in last year's terrible bear market, Meta's cost-cutting moves and solid execution in 2023 have been rewarded to a greater degree than Alphabet's fits and starts. GOOGL YTD mountain Alphabet YTD performance Starting with a closer look at Alphabet, both the Bernstein and UBS downgrade notes cited near-term headwinds more than anything structural or material in the long term. Analysts at both firms expressed concern over how the implementation of generative AI might hurt search-related ad revenues and boost expenses. At UBS, the analysts said, "We see medium-term revenue risk from new search (SGE) displacing ad inventory with gen-AI responses, which may take time to optimize." Bernstein analysts said, "After being criticized for moving too slowly on Generative AI, Google has been aggressively shipping gen-AI products and starting to integrate Bard into Google Search results. Google risks creating a near-term revenue air pocket by cannibalizing prime real-estate for their gen-AI results, which will take time for ad buyers to adopt." They also called out the risk of increasing competition, Meta regaining market share, shifting consumer behaviors and some "some near-term AI-related monetization risks all contributing to pressure Google Search growth." That said, Bernstein and UBS both also acknowledge that longer-term generative AI may very well prove a tailwind for Alphabet. That's more in line with our Club thesis. META YTD mountain Meta Platforms YTD performance Meta Platforms, meanwhile, has been getting better reviews. The analysts at Citi came away from the recent Cannes Lions Festival of Creativity, calling the broader online advertising market "stable-to-improving." They think that Meta stands to be a key beneficiary thanks to the increasing adoption of Reels short-form video. They also cited new ad products and more engagement growth thanks to "greater usage across Feed, Stories, Messenger, and WhatsApp." Citi said that while Instagram app downloads in the second quarter are tracking about 12% below TikTok downloads, Instagram's monthly active users (MAUs) are estimated to be up 6% annually, versus TikTok's 4% annual increase. As a result, overall MAUs are projected to be about 20% higher on Instagram versus TikTok. Instagram also appears to be closing the gap in terms of time spent on the apps — about 31 hours per week for TikTok and about 22 hours per week for Instagram. By the way, regarding engagement, we learned Tuesday that WhatsApp Business now has over 200 million MAUs, up from 50 million in 2020. The analysts at UBS focused their price target increase on Meta's generative AI opportunity, calling out chatbots as the top, near-term use case to "deliver ad and demand signal." The introduction of generative AI, which could improve the shopping experiences already being built out on Instagram and WhatsApp, also speak to the concern of rising competition for Google Search. That's because they may be viewed as more specialized ChatGPT-like assistants. To this point, the analysts said, "Snap's My AI chatbot is seeing considerable commercial activity that [they] see as a preview for Meta." Users are using the Snap bot to ask about everything from travel recommendations to skincare and cosmetics and clothing/apparel. Bottom line Both Meta and Alphabet are likely to benefit from generative AI in the long-term — even if Meta has more clearcut benefits in the near term. However, neither stock has a very demanding valuation with GOOGL trading at 18.4 times fiscal year 2024 earnings estimates and 16.4 times free cash flow estimates; and META trading at 19.2 times 2024 earnings estimates and 25.9 times free cash flow estimates. We also want to point out that Wall Street notes in general — and particularly these Alphabet ones — are focused on more near-term dynamics. In other words, more active investors with a shorter-term focus than many home gamers may have. As a result, if you're a longer-term investor, it can be helpful to review the notes in order to stay informed or make decisions here and there about when to buy or book profits around the edges of a core position, which we are currently debating internally. However, Wall Street research should be considered in the context of the clients it serves, which are professional money managers. So, you have to ask yourself, given Alphabet's valuation and longer-term opportunity, does it make sense for most long-term investors to try and hop out of the stock at $118 per share in order to try and hop back in at $110? The answer is generally, no. Trading in and out of a stock requires you to be correct over and over again — selling it at the right time and buying it back at the right time. For now, our bias in GOOGL, given its current valuation and our longer-term bullish view, is to leave the position as is for the moment. (Jim Cramer's Charitable Trust is long GOOGL, META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Google and Facebook parent Meta are some of the companies that have laid off workers in recent months.

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Wall Street analysts continued to favor Meta Platforms (META) over Alphabet (GOOGL), sending shares of META up more than 3% and GOOGL shares just slightly higher Tuesday.