Alphabet vs. Meta Platforms: Which "Magnificent Seven" Titan Has More Room to Run in September?

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Meta Platforms (NASDAQ: META) are often compared because they are both advertising giants. Alphabet gets its ad revenue from its Google Search engine, YouTube, and other platforms connected to these two. Meta operates some of the leading social media platforms, including Facebook, Instagram, WhatsApp, Threads, and Messenger. These two are the biggest advertising companies by far, but which one makes for the best investment in September?

Let's look at these two and see which one makes the most sense.

Image source: Getty Images.

AI is becoming a big part of these two companies' business

Both Alphabet and Meta Platforms want to capitalize on one of the biggest tech movements in history: artificial intelligence (AI). Both companies are spending hundreds of billions of dollars on data centers this year to increase their computing capabilities. Each of them has already shown some level of innovation, as they have integrated various AI tools and features into their platforms to drive better ad conversions or increased prices.

While this has had a noticeable effect on revenue, it's not as much as investors want. The reality is, comparing these two advertising businesses is like splitting hairs: Both are dominant and have their strengths and weaknesses. With both companies spending big on AI, I think it's better to compare this segment, as it clearly indicates the direction the company is going.

Alphabet has both AI models and a cloud computing business. Although the AI model segment of its business has an unknown payback, the cloud computing side is growing at a rapid rate and dramatically improving in profitability. This gives investors a real return on investment to score its investments by, which is something that Meta cannot say.

Meta is spending big on AI, but its models are open-source and free to use. That's not really a monetizable business strategy, and it has investors questioning why Meta is spending hundreds of billions on capabilities if it can't make any money from it. This has the market questioning Meta's path, and even though Meta insists it's playing the long game on AI and that this is the right path to take, it certainly doesn't look like it right now.

As a result, I think Alphabet's business strategy is far better than Meta's, but that isn't the only thing to consider.

Meta is growing faster and is cheaper

Despite Meta having a questionable path forward, it is growing faster than Alphabet and has done so for a while. However, that gap is closing.

GOOG Revenue (Quarterly YoY Growth) data by YCharts

If Alphabet's growth rate continues to accelerate, which it probably will, given how much it's investing in the computing capabilities of its cloud computing wing, Google Cloud, I think it's inevitable that Alphabet will become a faster-growing business than Meta.

Another factor investors need to consider is valuation. Right now, Alphabet's price-to-earnings ratio is skewed by one-time gains on investments, making a direct comparison impossible. But if we use operating profits to value the companies, it removes that one-time effect. From this perspective, Meta is far cheaper than Alphabet.

GOOG Operating PE Ratio data by YCharts

Cheaper doesn't always mean better. In fact, I think it means that the market is skeptical of Meta's plans versus Alphabet's. These two used to trade in lockstep, but they now have diverged after Meta's initial AI path seems like a flop while Alphabet's is working out.

So, which is the better buy? On paper, Meta is technically still growing faster and is far cheaper. But I think it's cheap for a reason, and Meta's growth may not be sustainable. As a result, I think that Alphabet is the better buy because its AI strategy is sound and appears to be working out well for it.

Keithen Drury has positions in Alphabet and Meta Platforms. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.