Every industry needs a reform every now and then, you know, the type that used to rely on fax machines and had so many departments that offices turned into mazes. As is natural in a free market, change and innovation hit those old-fashioned businesses the hardest, just Airbnb (NASDAQ: ABNB) and Uber Technologies (NYSE: UBER).
One of the backbones of business is advertising, and that industry has also gone a long way from the days of David Ogilvy, you know, the business types featured in the TV show 'Mad Men'. In today's world, which counts on an increasingly digital economy, where do you think advertising has gone?
Think about it: where do you see advertising being thrown at you? The simple answer is YouTube, Instagram, and Facebook, among similar platforms. And it makes sense! It's cheaper and infinitely more effective even if you hire a small agency. This means that Meta Platforms (NASDAQ: META) and Alphabet (NASDAQ: GOOGL) stand in the way of millions of ad dollars.
Here to stay
Alphabet, better known as the parent company that runs Google, owns YouTube. This is the most popular and commonly watched streaming platform in the world. Tens of thousands of advertising videos are being shown every minute of every day. Now, do the math and figure out how much money that makes Alphabet.
According to the latest quarterly financials from Alphabet, the company stated that YouTube ads generated $7 billion in revenue, whereas Google Search brought home the bacon, the bacon being $39.5 billion in revenue. Remember how technology and innovation kicked up the margins in the industry?
If you dig into the company's financials and get stuck on ROIC (return on invested capital) rates, you will see why Alphabet could be a stock to hold for the foreseeable future.
Over the past five years, the company has generated an average ROIC rate of 17.5%; why is this important? Over the long term, annual stock price performances tend to mirror the long-term ROIC rate; how would you like to make double-digits on a company that will likely be here for a few more generations?
When all else is equal, earnings per share typically drive stock price action and valuations as well; regarding Alphabet, the past twelve months brought you an EPS growth of 45.7%. Now, is there any more upside left to the stock?
Management has bought back $15.7 billion worth of stock in the past year, which could imply that these same insiders believe the stock to be cheap. You should check with analysts and competitor Meta to confirm the story, so here it is:
Social proof
Meta delivered a similar story in its latest quarterly financials, where the whole company generated a total of $34.1 billion in revenues, $33.6 billion of which came from advertising activities; that's 98.5% of the pie!
Just like Alphabet, these activities carry minimal cost, as businesses provide their capital into advertising budgets and use small agencies to create content to be posted on platforms like Facebook and Instagram, and that's where the buck stops.
There's the beauty of this business: they take on minimal risk or operational cost and get to keep all the cash regardless of how the ad looks or performs. How much money? In terms of ROIC, Meta financials match Alphabet's at an average of 17.3% over the past five years.
When it comes to EPS growth, Meta blows the technology sector (large-caps, namely) out of the water with its 174.0% jump over the past twelve months. And guess what? Management also poured $3.5 billion into buying back the stock, even after a 167.1% rally this year.
Notice how that price action matched the EPS growth? Now, where do analysts see the future of both Meta and Alphabet when it comes to their earnings and price targets? Will they stay within the long-term ROIC rates?
Alphabet analysts are shooting for a 15.8% advance in EPS for the next twelve months and a consensus price target of $147.5 a share; there is an implied 11.8% upside from today's prices. It's not too wild, but your wealth could run wild at these rates if you give it enough time to grow.
Meta analysts turned a bit more bullish this time, with a 22.7% growth projection for EPS and a $349.5 price target to suggest a 5.0% upside from where the stock is today. While the upside is less significant than Alphabet's, you can't argue with the EPS's past record and future expectations.
The day that communism takes over the world and stops consumers just like you from buying things will be the day that advertising budgets die. Until then, keep these two on your watchlist for future potential investment.
