As you look for potential investments, you may be tempted to focus your attention on the companies you hear about or use every day. There is no harm in that strategy, but remember that you need to understand the nature of the industry and the particulars of the company before you invest your money there.
Investing in Advertising Companies
First, you need to understand that these companies may have very different products but they earn a large amount of their income from advertising.
Companies pay to place ads on their sites. Those businesses will only continue to do so as long as they get results from those ad placements.
That means that advertising giants like Facebook and Google will only generate earnings if they attract visitors frequently. They also need to offer a pleasant user experience so that those people linger on their sites.
Remember too that this is a generalization. Advertising revenue can come from different efforts and these companies have more than one way of earning income.
Before you buy any shares, make sure that you understand exactly how that business earns money as well as the different factors that could impact its earning ability.
Is Facebook Stock a Buy?
Facebook [NASDAQ: FB] does more than operate its namesake social media platform. The company also owns Instagram, an online app-based community for sharing photos and videos, as well as Messenger, a messaging application that integrates with Facebook.
Facebook has another messaging app called WhatsApp and a virtual reality (VR) ecosystem called Oculus. The latter includes both hardware and software.
Almost all of Facebook’s sales comes from ad placement on these offerings. However, the company is looking to expand and augment those revenue sources.
According to its annual report, it is developing consumer products and trying to find ways to leverage artificial intelligence (AI) technology to support new connectivity efforts.
Facebook [NASDAQ: FB] is in a very competitive industry. It vies against other companies who provide messaging services, some of which do not include advertising, like Apple.
It also competes against Google’s YouTube for videos and Tencent for messaging as well as different social networks. In order to remain successful, Facebook will need to retain and attract users on its various platforms and keep them active within those applications.
Going forward, Facebook [NASDAQ: FB] is facing several risks.
Security breaches and the way user information is used are some of the most significant. The company has been under fire for years now regarding its handling of data.
Also, governments may restrict the use of Facebook’s apps and media coverage has been unfavorable. Together, these issues form a real risk for how well Facebook will be able to remain popular and profitable.
That said, Facebook is priced low for that risk. It is currently in a 52-week range of $123.02 to $218.62 and it has a one-year target of $221.50. For that more than 19% projected increase, its forward PE is less than 20.
Should you Invest in Google Stock?
Alphabet [NASDAQ: GOOG] also earns a fair amount of its revenue from advertising (some 85%), but the array of products the company offers is much broader than that of Facebook. The company has its famous Google search engine, but it has many other offerings as well.
Alphabet has popular G Suite applications (i.e., Gmail, Google Docs, Hangouts) and the Google Cloud Platform as well as the Chrome browser, Android operating system, Chrome operating system, and virtual reality platform Daydream.
Alphabet also has a media component.
Its Google Play store sells games, movies, music, and other media. Moreover, while Facebook has several standalone apps, Google has a broad variety of offerings that form a sort of ecosystem that keeps users engaged and coming back.
With a broader range of products comes a larger number of competitors. There are companies that have their own search engines, like Microsoft’s Bing.
There is also the trend for more precise information.
Some people skip using search engines and go straight to dedicated sites for the information they want. For instance, they may use a site like Kayak to research travel instead of querying Google or ask followers on a social media platform.
Plus, there are also lots of different video, music, and gaming services that people may use, such as Amazon [NASDAQ: AMZN], Spotify [NYSE: SPOT], or Netflix [NASDAQ: NFLX] – and really, these examples just scratch the surface.
Competition is intense for Alphabet. The company has to continually evolve in order to remain relevant. Alphabet is forever tweaking its search engine algorithm to make sure its results are as relevant as possible.
Alphabet [NASDAQ: GOOG] also tries to do things to encourage people to become part of its ecosystem. Much the way Amazon has leveraged its Alexa line of products and its Kindle or Fire line before that to encourage users to choose Amazon first, Google has a variety of products designed to do the same.
Google Home, its line of Chromebooks, and other consumer devices may act as an introduction to Google services and, in turn, offer exposure to its ads.
However, those devices and the personal assistant technology included therein have to be as useful as possible to get people to keep coming back, instead of getting turned off Alphabet services by a lackluster product.
Right now, Alphabet [NASDAQ: GOOG] has a 52-week range of $977.66 to $1,296.97 and has a consensus estimate of $1,341.82 – a predicted increase of just over 16%.
The company’s forward PE is around 21.55. It is higher than that of Facebook but only marginally.
Facebook Stock vs Google Stock: The Bottom Line
Both Facebook and Google could be a good fit for SOME investor’s portfolio. Whether or not one or both of these companies are right for YOUR portfolio is another story.
Spend time learning about the challenges these companies face and the directions they are following before you buy any shares.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.