Seeking Alpha
Long/short equity, deep value, growth at reasonable price, investment advisor
Profile| Send Message|
( followers)  

Summary

  • Google and Facebook are similar in that both are still in their comfort zones (when it comes to revenue).
  • Google is a much bigger company with higher revenues, though Facebook is getting better at developing revenue streams than Google is.
  • The "moonshots" would give Google an edge in the long run and, possibly, in the very long run.

We all know of the high-tech war that the giants are fighting over us mere mortals. Google (NASDAQ:GOOG) vs. Amazon (NASDAQ:AMZN) vs. Facebook (NASDAQ:FB) vs. Apple (NASDAQ:AAPL). And now, a welcome return of Microsoft (NASDAQ:MSFT) to the fray of Those Who Matter.

But out of these, the fiercest battle would have to be the one between Facebook and Google, who have both been on an acquisitions spree in the recent past and, more than once, engaged in bidding wars with each other as well.

(click to enlarge)

How they're sort of similar

Of COURSE, they're different. One is a search engine that wants to catalog the world's information. The other is a social network.

But think about it: they are both still ensconced in their respective comfort zones. All the other companies mentioned above have, while still focusing on their mainstay, also branched out of their comfort zones into other areas. And these new projects have been financially fruitful as well.

Facebook and Google's forays into other areas, however, haven't been stellar. They both still get 90 percent of their revenue from advertising. Data licensing is another predictable (yet controversial) revenue source, and that's just about it.

Google's attempts to head out onto the social media front haven't been spectacular. The company recently announced the closure of Orkut. Its much-vaunted Google+ has also had a lukewarm response. It is still a large network, but in the age of Facebook, there is large and then there is gargantuan.

Facebook's attempt to enter the phone market with the HTC (OTC:HTCCY) First also bombed terribly.

Neither has made any money from newer projects.

Wearables: the war's most watched front

In one corner, we have the Google Glass. In Facebook's corner, there is the Oculus Rift.

Now, projections on this end are pretty much shots in the dark. Both of these products, if successful, are going to be creating markets of their own, not competing for slices of already existing pies. So even beta testing isn't going to give us a correct vision of where the numbers are going to go here.

Some might also argue that these two products shouldn't be compared in the first place. The Glass is augmented reality. The Rift is virtual reality.

As far as the always-on status of wearables is concerned, Glass has an edge over Rift. The latter immerses the user in an environment that is cut off from the rest of the world, especially visually. Great for games, say, but not so for walking about, the way Glass is going to be.

It remains to be seen how the two companies leverage the strengths of their respective products.

Facebook's (arguably) sensible buying spree

Facebook, eager not to let go of its dominance in the social media sphere, has been digging in its heels and focusing on acquiring companies that create a greater barrier to entry for other companies. There was the then-astronomical-now-common $1 billion acquisition of Instagram in 2012, which was a threat to Facebook as a competing repository of images online.

Then, there was this year's gargantuan acquisition, at $19 billion, of WhatsApp. The figure might seem huge, but it was reached at the end of a bidding war with Google, who also wanted the hugely popular chatting app. By scuttling Google's bid, Facebook ruined the former's first formidable shot at getting a foothold in social media.

Then there is the acquisition of Face.com. An effective recognition algorithm, what the Israeli company brings to the table is massive potential of tagging photos of friends.

All the above were meant to keep social media dominance firmly in place.

Google's "moonshot" projects

While Facebook does need to keep itself of its toes to stay on top of its game, there really isn't anything more that Google can do to remain at the top of its core business. There really isn't any competition. Just stay there and keep making incremental improvements in the search algorithm.

So what to spend on, then? Hugely ambitious projects, like the driverless car, military robotics, internet-providing high-altitude drones.

Expect a bigger investment horizon, but possibly a much bigger payoff.

What about investors?

Google is a much larger company than Facebook. Cataloging the world's information (not just websites) is a far more ambitious project than keeping people connected.

Google's market cap stacks up to about $390 billion to Facebook's $170 billion. They both might be interested in acquisitions, but Google has a lot more elbow space than Facebook. The former's rumored to have $59 billion in cash, whereas the latter has $11.5 billion.

Plus, there is the issue of the P/E ratio. Google's is a relatively respectable 30.24, whereas Facebook's is an ambitious 88.05.

So, all of the above would make Google a better bet than Facebook, right? Well, only maybe. You see, as far as ad revenue is concerned (remember it's 90% of the revenues for both companies), Google is slipping a bit and Facebook's only getting better.

Google's ad revenues are falling, never mind if they are still huge. The cost per click (CPC) of an ad, a far more valuable (and lucrative) metric than the CPM has fallen (even though the total ads have increased.)

More and more people are using the internet through smartphones, where Google, as opposed to Facebook, hasn't been able to attract much ad hits. Facebook's native advertising neatly folds into the mobile platform's interface.

It might be desperation that's driving the much-vaunted moonshot projects. As a joke around Silicon Valley says, self-driving cars are a far less complicated affair compared to mobile ads.

That doesn't mean Google doesn't have it in it to remain a stable company. Even though the CPC slipped by 9 percent, it would be pertinent to mention that the quantum of those paid clicks increased by 26 percent. And revenue from investments in projects like Nest, say, aren't in the league of other moonshot projects. Nest, specifically, would turn out to be one of the first success stories from the Internet of Things.

My bet is on Google. A company that has its eyes on the future and has enough money to be serious about it. So is Facebook, granted. But the synergies that Google's core business would provide this voyage into the future are something Facebook's core business cannot provide. It's as simple as that. Don't spout out Facebook's revenue figures to dispute my arguments (though I can put up a good fight there as well), but look at the future.

Many giants have fallen in the past. Drastic diversification, especially for a company as large as Google, is an effective bulwark against that. This advice isn't for the day traders. It's for those who are in this for the long haul.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Google Vs. Facebook: Who Wins Out In The End?