Facebook (NASDAQ: FB) and Google parent Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) Two worst performing FAANG stocks in 2020 and far behind apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), and Netflix (NASDAQ: NFLX) During the onset of the COVID-19 pandemic.
Between Facebook and Alphabet’s trust in advertising (which tends to take a hit during the recession) and regulatory concerns (both facing lawsuits and possible segregation of their businesses), this poor performance makes sense. However, both companies are full of cash and could be lining up for a big bounce as digital advertising continues to take over traditional ads. Which one is better buying?
Facebook: social media giant under fire
The social media empire responsible for Facebook, Instagram and WhatsApp has been at the center of controversy for years. This will likely not end as soon as the Federal Trade Commission (FTC) sues Facebook for anti-competitive behavior. If the FTC has the way, Facebook will have to leave Instagram and WhatsApp, which it bought in 2012 and 2014 respectively.
I’m not convinced that this will happen An endgame for Facebook. Ultimately, it will likely result in cash revenues from the sale or division of one of these businesses. But meanwhile, the social media leader is doing more than just staying on his own during the epidemic. While advertising sales took a big hit last spring, it soared rapidly as small businesses began to rely more and more on platforms to reach their customers.
Specifically, revenue grew 22% year-over-year in the third quarter, skyrocketing from 11% year-on-year gains notched in the second quarter. In the first nine months of the year, total revenue was about 17% higher than in the same period of 2019. Also, despite ongoing expenditure to update privacy controls and comply with other regulatory demands, free cash flow (revenue minus cash operating expenses and capital expenditures) was $ 13.8 billion on revenue of $ 57.9 billion – good for a free cash flow margin of 24%.
Facebook also had $ 55.6 billion in cash and securities with zero debt at the end of September. If it needs to sell Instagram, WhatsApp, or both, the war chest will likely grow larger, a powerful tool the company can use to support the Oculus virtual reality business or other goals such as digital payments. Space. For now, 99% of Facebook is advertising, but the company could be much more in a decade.
Google: Search is basic but not the only game
Google faced antitrust. Lawsuit from the Ministry of Justice (DOJ) claims to be anticompetitive in their strategy to protect the internet search and advertising business from competitors. However, the case will not go to trial until 2023, and in the meantime, Google may diverge further from its digital advertising roots.
It is already on its way to doing this. Advertising accounted for 80% of total revenue in the third quarter, but Google Cloud is making great progress. Sales in this segment increased 45% year over year to $ 3.4 billion (7.5% of revenue). Google Other, which includes app store sales, subscriptions via YouTube, and hardware such as the Pixel device line, grew 35% to $ 5.5 billion (12% of revenue). Next is the moonshot portfolio of loss-generating but potentially game-changing start-ups like Waymo for self-driving cars and Verily in the life sciences. Google is pouring large amounts of cash to quickly grow these businesses.
Speaking of cash, Google really has a ton. Even after the company supported its high growth efforts, it generated $ 25.6 billion of free cash flow in the first nine months of 2020 with revenues of $ 125.6 billion – a free cash flow margin of 20%. And this is a period when Google advertising has caught a one-year decline in the first three months since the 2008 and 2009 financial crisis. As the effects of the pandemic gradually fade and marketing activities continue to turn digital, Google is a big 2021 like Facebook.
Also, like Facebook, investors may be concerned about regulatory action against the internet giant. But with approximately $ 132.6 billion in cash and marketable securities, it’s one of the deepest-pocketed organizations in the world, offset by a total debt of just $ 13.9 billion. He’s already on the way to being more than the only trick, I won’t bet against Google in the long run.
Which one is better buying?
With Facebook and Google big tech Overall, both face stricter regulatory action in the coming years, but no company will easily topple. Even though I own shares of both, if I only had to choose one, I would go with Google.
Both stocks are trading for a 4x premium after 12 months of free cash flow, but I think Google will be ready for a bigger recovery in the advertising business next year or later. It’s also more diversified, and other high-growth businesses like Google Cloud can start paying big when they reach a profitable scale. Plus, there’s something to be said about owning a mountain of cash like Google’s. Alphabet stock received my endorsement as the best FAANG stock for 2021, after outperforming its big-tech counterparts in 2020.