Alphabet, Facebook's Businesses Are Strikingly Similar

This article originally appeared in the Motley Fool.

Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) CFO Ruth Porat described the company's investments and growth in three "waves" yesterday at the Morgan Stanley Technology, Media & Telecom Conference. The first wave is its immediate focus on its core advertising business, led by mobile search. The second wave is "Google's biggest bets" -- cloud, hardware, and YouTube subscription revenue. The third wave is in the company's long-term "other bets" such as Verily and Waymo.

As Porat was describing these "waves," I was reminded of regular comments from Facebook (NASDAQ:FB) CEO Mark Zuckerberg. Zuckerberg regularly updates investors on his company's three-year, five-year, and 10-year goals. Over the next three years, Facebook will focus on every aspect of video across its apps. Over the next five years, the company will build services for businesses to reach customers on WhatsApp, Messenger, and Marketplaces, and to work more efficiently with Workplace. And Facebook will develop more advanced artificial intelligence and virtual reality technology to "bring the world closer together."

Looking at both Alphabet and Facebook from that 30,000 foot view, they seem strikingly similar. So, let's examine each segment and do a side-by-side comparison.

The Immediate Focus

Alphabet's immediate focus is Google's core advertising business, specifically its Google-owned sites. The biggest drivers of ad revenue are the continued growth of mobile search and YouTube. Those led to a 24% increase in Google properties' ad revenue in the fourth quarter.

As people spend more time on the internet thanks to the proliferation of smartphones, Google has been a big winner. And as consumer trends shift from other media to using the internet for information and entertainment, Google stands to keep winning.

To that end, Facebook is making a big push into video as a way to capture consumers' attention and help replace their TV habits. Zuckerberg said the Stories format is becoming the most popular way to share on social media, and Facebook is investing heavily in seeding content for the Watch platform, which competes with YouTube. Interestingly, Facebook is pulling back on the amount of videos people see in News Feed, while it focuses on improving engagement and interaction between users.

Google's immediate focus stands on much more solid footing than Facebook's, but both are benefiting as consumers spend more time on mobile instead of watching TV or reading magazines and newspapers.

Early-Stage Developments

Google's medium-term focuses -- the cloud, its hardware business, and subscription revenue from YouTube -- are off to a strong start. The cloud business recently surpassed $1 billion in quarterly revenue, and Google is the fastest-growing public cloud provider. The Google Home Mini spurred sales of Google's smart speakers, and it's now selling more than one Home device per second.

While YouTube's Red subscription service has had a slow start, YouTube TV appears to be racking up customers: Over 300,000 subscribers have come on board since its launch in April. Still, that trails Hulu Live, which launched around the same time, as well as older linear TV streaming services from legacy pay-TV providers.

Facebook, likewise, has had mixed results with its medium-term goals. A growing number of businesses are communicating with customers on Messenger and WhatsApp. Facebook just released WhatsApp Business as a way to provide tools to businesses using WhatsApp for customer service, and start to monetize those interactions.

Workplace, meanwhile, continues to win big contracts, most recently winning a deal with Walmart. It now has over 30,000 businesses on board, as it looks to compete with more established workplace productivity apps.

The Moonshots

Alphabet's "other bets" remain big money losers; their combined operating loss neared $1 billion last quarter. That's actually an improvement from the previous year, largely thanks to a pullback in investment for Access -- Alphabet's high-speed internet division, formerly known as Fiber.

Still, the company is showing lots of progress with Verily, its life-sciences division. Waymo, likewise, is getting close to launching a consumer service to take advantage of its driverless vehicle technology. Nest continues to grow, but it's being shifted to Google's hardware segment as it integrates with other devices from the company running Google Assistant.

Facebook's biggest moonshot is Oculus, which is the leader in virtual reality headset technology. The company already has several devices available for consumers, with the Samsung Gear being the most popular. The biggest hurdle for Oculus to overcome is the reliance on other hardware.

Both companies are on relatively equal footing when it comes to long-term bets. Alphabet's seem to be more varied, however, as Facebook is largely focused on virtual reality, which Zuckerberg calls "the next big computing platform."

The Similarities Are Uncanny

Google and Facebook are, of course, the two biggest names in digital advertising, but the similarities of the two companies extend well beyond that.

The long-term focuses of each company make them well-positioned to continue their stellar growth for many years to come. They both plan to maximize long-term returns through product innovation, while maintaining growth in their core businesses through incremental investments.

Furthermore, their management teams have the ability to communicate a framework for immediate and long-term goals to investors, making it much easier to forgive any short-term pressure on profits from product changes or investments, as long as they fit into the framework. That makes both Alphabet and Facebook great long-term investments.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levyowns shares of Alphabet (C shares) and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has the following options: short March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.