Alphabet Faces Challenge from Meta Amid AI Push in Advertising

Alphabet is the fifth-largest company globally, boasting a market capitalization of $2 trillion. Its leading position stems from dominance in the search engine market, a flourishing cloud computing segment, and a significant presence in digital advertising. To sustain long-term growth, Alphabet is actively deploying artificial intelligence (AI) tools across its key sectors. The early results from these AI investments appear promising.

The company reported a 28% year-over-year increase in Google Cloud revenue during the first quarter, alongside strong growth in other business areas. Alphabet’s new AI-driven search and advertising solutions are also gaining traction, indicating the potential for a robust growth trajectory.

Nevertheless, another prominent tech giant is outpacing Alphabet’s returns. This company is capitalizing on the rapid adoption of AI in the digital advertising sector. A deeper look at this contender reveals why it could surpass Alphabet’s market cap within the next three years.

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Meta Platforms Outperforms Alphabet: A Continuing Trend?

Meta Platforms (NASDAQ: META) has experienced impressive growth, with stock prices soaring by 181% over the past three years compared to Alphabet’s 40% increase. The stronger returns for Meta are attributed to its faster revenue and profit growth.

META Revenue (TTM) data by YCharts; TTM = trailing 12 months.

Recent financial results suggest Meta may continue to outpace Alphabet. In the first quarter, Meta reported a 16% year-over-year revenue increase, exceeding Alphabet’s growth by 4 percentage points during the same period. Meta’s adjusted earnings surged 37% to $6.43 per share, outperforming Alphabet’s 20% increase after accounting for significant unrealized gains from a private investment.

The growth can be linked to an expanding user base, more ad impressions, and an increase in the average ad price. Meta reported 3.43 billion daily active users across its platform in the last quarter.

Additionally, Meta’s AI-driven advertising tools contributed to a 5% rise in delivered ad impressions and a 10% increase in the average price per ad. This is an improvement compared to a 6% rise in the average price from the same quarter last year.

CEO Mark Zuckerberg highlighted during the earnings call that AI tools are gaining popularity among advertisers due to their ability to enhance the effectiveness of advertising spend. The company’s AI-enhanced content recommendations are driving engagement on its platforms including Facebook, Instagram, and Threads.

Zuckerberg stated: “AI has already made us better at targeting and finding the audiences that will be interested in their product than many businesses are themselves, and that keeps improving. And now, AI is generating better creative options for many businesses as well. I think that this is really redefining what advertising is into an AI agent that delivers measurable business results at scale.”

Zuckerberg noted that AI could boost advertising’s share of the global economy through enhanced productivity. Meta estimates it could generate between $460 billion and $1.4 trillion in revenue from generative AI by 2035, a significant increase over the projected $2 billion to $3 billion by 2025 from its generative AI products.

Analysts project Meta’s revenue will reach $186.5 billion by 2025, indicating substantial growth potential in the coming decade, driven by AI advancements. Consequently, Meta has raised its 2025 capital expenditure guidance to between $64 billion and $72 billion, up from the previous estimate of $60 billion to $65 billion.

Zuckerberg affirmed that the additional capital will support both generative AI initiatives and core business operations. This strategic investment aligns with Meta’s vision for tapping into the lucrative AI market over the next decade.

Potential for Meta to Surpass Alphabet in Earnings Growth

Currently, Meta ranks as the seventh-largest company globally with a market cap of $1.5 trillion, trailing Alphabet which has a market cap 33% larger. However, if Meta continues its stronger earnings growth, it has the potential to close this gap in the next three years.

META EPS Estimates for Current Fiscal Year, data by YCharts; EPS = earnings per share.

In contrast, Alphabet’s earnings are expected to increase by almost 7% next year and 14% in 2027. If Meta’s earnings rise to $32.90 per share by 2027 and the stock trades at 28 times earnings—aligning with the Nasdaq-100 earnings multiple—its stock price could soar to $954, reflecting a 60% increase from current levels.

Thus, there is a considerable likelihood that Meta’s strong earnings growth will translate to substantial market gains over the next three years. Currently trading at 23 times earnings, Meta’s stock offers investors a potential bargain compared to the broader market index.