The Most Powerful Company on Earth?

Meta versus Google. They're the two behemoths in the digital advertising world. They dominate the field. They print money. They have some of the strongest most I've seen in my time looking at financial markets. But which is the better business looking through the eyes of a long-term Warren Buffett-style investor? Well, you guessed it. That is exactly what we're going to be exploring in this video, from business models to competitive advantages, balance sheets, valuation, and of course, the risks that they face. So, let's get started. And I will say, this is a totally new type of video for the channel. So, please let me know if you like this down in the comment section below. And of course, leave a like if you enjoy it. Okay. First up, a backdrop. What do they do and how much do they make? Both of these businesses' primary gig is, of course, selling ads, digital advertising. Google sells ads predominantly through its search engine. If you want to rank highest when someone searches plumber near me, well, you have to pay. Now, that business earned Google $198 billion in revenue in 2024, way more than any other revenue stream. They also sell ad space on YouTube, you know, those annoying ads that appear at the start of the video. Well, to Google, there's another $36 billion in revenue. And finally, Google's third-party ad business, ads that people place on their own external websites, that earned them another $30 billion. Meta, on the other hand, shows ads solely through its social media apps, namely Facebook and Instagram. You're scrolling through your feed or watching some reels, bang, there's a targeted ad waiting for you to click. It's also worth noting that Meta also own WhatsApp and Messenger, but they're not really monetized as of today. They don't really need to though, as in 2024, Meta earned $160 billion in advertising revenue from their apps, staggering 97.6% of their total revenue. So, on ads alone, Google generates approximately $264 billion in annual revenue, whereas Meta generates $160 billion. But what about other revenue sources? In Google's case, there are three more things to consider, subscriptions, platforms, and devices, including things like YouTube Premium, Google One, Play Store revenue, and Pixel devices, Google Cloud, Google's cloud computing service, and Other Bets, a series of small startup-like projects that haven't really scaled up to be anything significant. They also add $40 billion, $43 billion, and $1.6 billion of revenue to the tally, giving Google an additional $85 billion in non-advertising revenue. Meta, on the other hand, has just one additional revenue segment, that being the controversial Reality Labs, their AR slash VR division, which earned them an additional $2 billion in revenue in 2024, but cost them much more. So, this is the high-level overview of both companies. In total, Google generated $350 billion in revenue in 2024, whereas Meta generated $165 billion. Then, after considering expenses, Google was able to keep $112 billion of their revenue as operating income, while Meta managed to keep $69 billion. But raw numbers aren't the only consideration, because despite Google making more cash in total, the percentage of revenue it keeps as operating income is 32.1% versus Meta, who keeps 42.2% of what they make. So, who wins this round? Well, to be honest, they're both pretty good, and you could argue a case for both of them. Meta is a simpler business, which Buffett-style investors absolutely love, and that works really well for them, as they have such a strong network effect. There are 3.35 billion people interacting with at least one of their apps every single day. That makes it very easy for Meta to just focus on the ads. Nobody is going to stop using Instagram or Facebook because they saw another ad, and they use this competitive advantage to full effect, keeping their operating margin at 42.2%. That's an insane margin. But I think if I was casting the vote, which I am, I do think Google stands slightly above here. They may keep a lower percentage of their revenue, but there's value in their diversification. YouTube and Google Network diversify their ad revenue, and Google Cloud is another big one to watch in the future because these services are in hot demand and are also very high margin. So, it's a tough one. We do also have to acknowledge that in Meta's case, they do have a massive money pit business pulling them down at the moment in reality labs, currently eating 17 billion per year, and I'll talk about that a little bit more in the risk factor section. But even putting that aside, I still think I'll give Google the point here. Also, before we move on, I just wanted to give a massive shout out to Seeking Alpha and specifically their premium subscription. I've been using premium for years now, and I kid you not, it is the only stock market analysis subscription that I use regularly. It makes these analysis videos so much easier, knowing that I can literally just pull from the last 10 years' worth of financial data, and it's all in one place. They've got a treasure trove of news and analysis to keep me up to date. And have a look at this. I'm looking at Google on screen here, and have a look at all these metrics under profitability, growth, or valuation. They have every metric you'll ever need. And thanks to the Seeking Alpha rating system, it makes it super simple to see red flags when they pop up. It's really great. I rate it a lot, and they also currently have their spring sale live. So for those that use my referral link in the description and pinned comment, you can enjoy a seven-day free trial and score a $30 discount on the Seeking Alpha annual premium subscription. Plus, if you're stuck for ideas, you'll also get your next Alpha pick for free. So check it out if you're interested, and thanks always to Seeking Alpha for sponsoring the channel. Okay, moving on. Next section, Metaverse Google, the moat. And I'm sure it doesn't come as a shock that, yes, both of these businesses have very wide moats. To achieve margins as high as they both have is very rare, and that usually indicates they've got something special going on. In the case of Google, they have a scale advantage, which really now is a monopoly. Users have a near reflexive habit of Googling anything they need. I mean, Google is now a verb. Overall, the business handles about 90% of all internet searches worldwide, and such dominance creates a feedback loop. More users equals more data on queries, equals better search results, equals even more users. It's a classic scale moat. I mean, competing search engines like Bing technically exist, but at 4% market share, they most likely will never come close to dislodging Google's mind share or quality of results. Then on the flip side, Meta's moat is a classic network effect. As more users use their social media apps, the experience gets better, and that keeps people on the platform as opposed to on the platform of a competitor. In fact, I can pretty confidently say that you have a Facebook account, and for messaging, you probably use either WhatsApp or Messenger on the regular. As I said before, Meta now has 3.35 billion daily active users on at least one of their apps. That's 41% of the human population. We have collectively decided that these four social apps will be the core apps that we just all use, and that is a massive benefit to Meta because this scale also gives them a massive data advantage, for better or worse, which makes their advertising much more effective for advertisers. Overall, a very, very powerful moat to have. But who wins? Honestly, I can't fault either of their moats, and I can't choose between them either. They are both extremely powerful and will likely power growth in both of these businesses for many years to come. So, can't choose. They both score full points. Okay. Next section in our head-to-head, the balance sheet. The balance sheet essentially tells investors the financial health of the company as it shows what the company owns, what it owes, and what's left over. Because of this, it also specifically tells us how much cash they've got stashed in their coffers to fall back on, and it also shows us how much debt they've taken on. So, are they taking big risks? The name of the game? High assets, low liabilities, lots of cash as a cushion, and not much debt that can get you into trouble. So, let's start with Meta. And honestly, they have one of the best balance sheets I've ever seen. Why? Well, let's have a look. As of their 2024 annual report, Meta had $44 billion in cash just sitting there as a cushion, with another $34 billion sitting in short-term investments like short-term treasuries. So, effectively, they've got $78 billion of Not bad. For context, it's estimated that the total damage to insurance companies from the Palisades fires was between $20 and $40 billion. So, Meta's cash cushion would enable them to effectively pay all the damages for two of those disasters. You know, not that that's a great example for the business that they're in, but kind of shows you the scale. You know, it's a lot. Then beyond the cash, they also have $100 billion in current assets, $276 billion in total assets, $33.6 billion in short-term liabilities, and just $93 billion in total liabilities. So, what investors are particularly concerned with is short-term assets versus short-term liabilities. They like to see short-term assets at least double the short-term liabilities. And in this case, Meta has three times as many current assets versus current liabilities. Then lastly, how's the debt? Well, Meta have no short-term borrowings and just $29 billion of long-term debt. This is great because if push came to shove, they could pay down their total debt just with the cash they have lying around. That's a very strong position to be in. Overall, a very impressive balance sheet and proof that Meta is a financial fortress. But how does it compare to Google? Well, surprisingly, Google's balance sheet is just as good if not better. They have $23 billion in cash and $72 billion in short-term treasuries, giving them total cash and equivalents of $95.6 billion. Then in terms of total current assets, they have $163.7 billion, $450 billion of total assets, $89 billion of current liabilities, and $125 billion of total liabilities. Yeah, this is why people want Google to be broken up. Now, to be fair, Google doesn't have quite as strong of a current ratio as Meta, around 1.8 times current assets to current liabilities versus Meta at 3. But in terms of raw numbers, they have almost $100 billion in cash lying around, just $1 billion in short-term debt obligations, and $10.8 billion in long-term debt obligations. They have 8 times the cash to what they have in debt, aka it's going to be very, very hard to sink Google's battleship. You know, maybe if Russia can enforce its fine, they might have something to worry about. But until then, they're pretty safe. So again, both businesses have incredible balance sheets, but I think if I had to give it to one of them, I would choose Google. And then we get to the valuation. And I do want to say that this next section is not meant to imply a buy-hold or sell recommendation on either of these businesses. At the end of the day, what the numbers say and what the stock prices do are two totally different things. So please remember, this is general information only, and it might not be right for you. But when we look at Google and Meta, we do get some interesting results. Google's current market cap is around $1.8, $1.9 trillion, whereas Meta's is around $1.2, $1.3 trillion. And this gives Google a PE ratio of around 20, and Meta is also about 20. Now, of course, when you're doing a deep analysis on a business, you definitely need to do a full discounted cash flow analysis. But on quick glance, very, very similar multiples being put on both companies. Now, they're not exactly cheap, but I was surprised because last time I checked, these businesses were both quite a bit pricier than what they are today. And that's thanks, of course, to the recent sell-off we've seen across the board. For context, Warren Buffett's famous investment in Apple occurred when the business sat in a PE range of about 16 to 18. And as Buffett-style investors, we are, of course, willing to pay fair prices for wonderful businesses. So, neither Meta nor Alphabet's valuation appears outrageous. If anything, considering their recent growth resumption, some analysts might argue that they are reasonably priced. And with the market being very volatile lately, I think they at least deserve a spot on the watch list. And then what about valuation from a price to free cash flow perspective? Well, in 2024, Meta generated $36.541 billion in free cash flow versus $56.748 billion for Google, giving Meta a price-free cash flow multiple of $34.8 and Google a multiple of $32. So, it really is pretty impossible to separate these two businesses at the current time. If I had to choose one, I'd probably choose Google on the quick glance valuation. But again, they are so close, this could flip-flop on literally a daily basis depending on price movements. Both go on the watch list for me. And then finally, our last category in this head-to-head is, of course, risks. What are the big problems with these businesses, if any, and who faces more uphill battles? And for both of these companies, the major risk above and beyond anything else is regulatory risk. Both Meta and Alphabet are under pretty intense scrutiny from the regulators around the world. Governments have grown concerned about big tech monopolies, user privacy, content moderation. For example, Google is the dependent in multiple antitrust cases, the most notable being the US Department of Justice's ongoing case alleging Google's search default deals stifle competition. But then again, Meta has faced antitrust scrutiny as well, as discussions swell about whether Meta's past acquisitions, being Instagram and WhatsApp, created an anti-competitive situation. And let's not forget privacy regulations like Europe's GDPR or Apple's policies can directly impact Meta's targeted advertising effectiveness as well. So, there are regulatory risks in both camps. But I think Meta is also facing another big risk with what they're doing with reality labs. Now, I do want to be fair, this could create a whole another business segment for Meta in the future if AR and VR take off. But at the moment, investors are very much on the fence as to whether their massive annual spend into reality labs is worth it. As I said earlier in the video, in 2024, Meta lost $17.7 billion in their reality lab segment. And that loss continues to worsen every single year. Now, that's money that could have gone right back into their shareholders' pockets. But instead, they decided to spend it on what they hope will be the next big thing. Now, again, I don't want to judge prematurely as it might be the next big thing. But one thing is for certain, they are taking a very big financial risk with this should reality labs ultimately prove unsuccessful. No, it's not a risk that is endangering the financial health of the company or anything as they're still very, very cashflow positive. But it is a risk factor for the potential investors out there to understand. And to be fair, had I made this video a few years ago, I probably would have said the same thing for Google because of their consistent losses in their cloud business. But as of today, that business has finally turned profitable. So for the risk section, I think I do have to go and give it to Google. Although I think it is worth noting that neither company faces existential risks at the current time. Nothing crazy. And with that said, that brings us to the very end. So who wins? Well, it's a tough call. While Meta's simpler business structure and impressive margins are hard to beat, Google's diversified revenue, slightly stronger balance and monopolistic dominance in search to me, give it the slight edge. In my opinion, Google's mode is just a little bit wider. And in terms of regulatory battles, I think Meta is a slightly bigger target than Google, at least at the current time. But with that said, let me know your thoughts in the comment section below. And if you enjoyed this head to head format, don't forget to like this video and subscribe for more content. And once again, big thanks to Seeking Alpha for sponsoring this video. Check out the premium subscription using the link in the description for a seven day free trial and a $30 discount. Thanks very much for watching guys. And with that said, I'll see you all in the next video.