Meta, Google, and Amazon compete in the AI market; why is Meta superior?

Summary:

After Meta Platforms' earnings report was released, its stock price was hit hard, while the stock prices of its rivals Google and Amazon were rising, and all three technology companies said they would invest a lot of capital expenses related to artificial intelligence.

The three major advertising platforms are competing fiercely to provide new and powerful generative artificial intelligence capabilities to capture future advertising revenue.

Meta has a unique advantage over its main rivals, and it is now using this advantage to triumph in the AI era.

The share price of Meta Platforms (NASDAQ: META) plummeted by more than 13% after the financial report was released in the first quarter of 2024, but the stock prices of Google and Amazon rose after the earnings report, and all three technology companies indicated that they will make large AI-related capital expenses in the coming year. Compared to the core businesses of Google (GOOG) and Amazon (AMZN), Meta's less positive revenue outlook does make investors wary. Although these three tech giants operate different types of businesses, they all have a huge portion of advertising revenue and will compete fiercely for future advertising revenue in the new AI era.

In this article, we'll explore how Meta is developing its business communications capabilities in the generative AI era to drive shareholder returns. As artificial intelligence-driven generative chatbots become more common in boosting various forms of commercial activity, Meta has a unique edge in the increasingly intense competition among the top three advertising platforms.

With the rise of ChatGPT and the generative AI revolution in full swing, the three major advertising giants Meta, Google, and Amazon are all striving to change the consumer experience on their platforms through chatbot-based search and discovery features, including Meta's AI Assistant, Google's Gemini and Search Generated Experience (SGE), and Amazon's Rufus.

Google and Amazon have shared examples of how they intend to display ads in chatbot-based services to convince shareholders that their search-based advertising business can continue in the AI revolution.

On the other hand, given that Meta platforms like Instagram and Facebook focus more on discovery than search, Meta executives haven't felt the need to provide details on how to display ads in Meta's AI assistant. The market believes that generative AI is less disruptive to the social media giant than the impact on Alphabet's search business, while Amazon is still trying to catch up with Meta and Google in the AI model competition. These factors are part of the reason Meta shares outperformed Google and Amazon over the past year.

Over the years, Meta has used the popularity of messaging apps such as WhatsApp and Messenger to promote commercial messaging through “click to message” ads, where shoppers can directly contact merchants to learn more about products they are interested in.

This allows advertisers to communicate directly with potential customers, enables businesses to better understand shoppers' needs, and also provides merchants with the opportunity to cross-sell more products. In fact, a 2022 Forrester Research study showed:In integrated organizations, the order value generated through Meta business message interaction is 20% higher than the average order value.

This positive commercial outcome really benefits Meta's investors, and this higher demand for its advertising solutions can increase revenue and shareholder profits.

Until now, such commercial messaging features have been more widely adopted in countries with lower labor costs, such as India, where businesses have the ability to hire employees to respond to online messages from potential customers. However, in North American countries where labor costs are high, this practice has not been widely adopted by businesses.

At the moment of the generative AI revolution, Meta is experimenting with automated commercial chatbots using its self-developed large-scale language model “Llama 3.” These chatbots can respond to consumer inquiries and encourage them to buy various products on behalf of merchants. Meta executives refer to these chatbots as “commercial artificial intelligence.”

In fact, when discussing forward-looking AI opportunities during the first quarter of 2024 earnings call on the Meta platform, CEO Mark Zuckerberg declared:

If Meta can effectively automate chat-based interactions between merchants and shoppers, this could drive greater demand for Meta advertising solutions and translate into higher ad revenue.

This is different from how Google and Amazon are currently deploying large language models on their platforms, whether it's Google's SGE or Amazon's Rufus, which are all committed to connecting shoppers and merchants through a unified chatbot. So when shoppers tell the chatbot what they're looking for, Google/Amazon tries to display relevant product ads in or around the results. The market is still watching carefully to see if these new forms of advertising can be as profitable as traditional advertising solutions.

Obviously, if consumers decide to begin product searches through this generic conversational AI feature, Meta may also have to take a similar approach to using its Meta AI assistant.

However,Meta's real advantageThe reason is that it can facilitate direct dialogue between consumers and AI chatbots customized by merchants (i.e. “commercial AI”). This conversation function will use the merchant's data for specific training. When a shopper initiates a conversation through a “click message” ad on a traditional image/video ad found on Instagram/Facebook feeds, these features can promote that merchant's product/service to the shopper.

Although Google and Amazon are experimenting with advertising formats for their generic chatbot services, I believe Meta's customized chatbot-based sales solution for each individual merchant may provide greater value to advertisers. Furthermore, it's unclear how much Meta will charge merchants to train and deploy their own custom chatbots, which will indeed affect the willingness of merchants to adopt these new generative AI solutions.

Currently, Meta is far from deploying automated business messaging capabilities on its platform, as CFO Susan Li shared during the earnings call:

Therefore, while these advertising revenue opportunities brought about by generative AI-driven and customized commercial AI are promising, Susan Li's remarks suggest that before these commercial AIs can be fully deployed and commercialized, a lot of iterative work is needed. As a result, the AI-driven revenue stream brought about by these initiatives will be realized gradually and will take time to materialize.

Despite this,Meta's key strategy to differentiate itself from competitorsThe Llama model series is open source, while Google's Gemini and Amazon's Titan models remain closed source. The open source Llama code should enable this social media to benefit from third-party developers innovating around large language models. Not only will this allow Meta's chat-based service to add new features more quickly, but it should also help discover new ways to run its AI models more cost-effectively, as CEO Mark Zuckerberg mentioned during the last earnings call:

Running more and more cost-effective AI models is not only critical to improving shareholder profitability, but will also play a key role in making Meta's artificial intelligence tools affordable for merchants and advertisers to adopt, thereby benefiting revenue growth and META investors.

Additionally, in addition to innovative contributions from the third-party developer community, Meta's own developers are also continuously improving Llama 3's capabilities, as Mark Zuckerberg shared during the earnings call:

The reason these incredible features are worth highlighting is because they provide tremendous commercial value. For example, it can enable commercial AI to better and faster understand what consumers are looking for, thereby allowing merchants to better grasp the tastes and preferences of customers, which in turn may increase customer satisfaction. If Meta can better connect merchants and shoppers than its competitors, and promote richer conversations, it could indeed lead to more ad money flowing to its platform, thereby increasing ad revenue and shareholder profits.

With the revolution in generative artificial intelligence, Google and Amazon launched chat-based services on their respective platforms. These competitors may also provide automated communication services between consumers, merchants, and advertisers to maintain competitiveness with Meta. However, simply introducing similar functionality doesn't necessarily pose a competitive threat.

Take Amazon, for example. The e-commerce giant launched the Rufus chatbot in testing to US mobile app users on February 1, 2024. In that conference call, they spent quite a bit of time discussing how they could use Rufus to enhance the shopping experience on the platform.

However, during the Amazon earnings call for the first quarter of 2024 last month, Rufus was never mentioned. Amazon didn't provide any details on how many people used the new shopping chatbot feature or the type of feedback they received. This raised questions about consumer usage or experience with Amazon Rufus.

If they have positive news to share, they will indeed actively share it given the company's rush to prove to the market that they are not falling behind in the AI competition.

However, due to a lack of insight into this new generative AI feature, there are issues or poor user experiences that need to be solved before sharing something positive with shareholders, and Amazon may not be able to handle these issues yet.

This is an indirect testament to Meta's prowess in the AI race, which has been providing insight into the user experience of Meta's AI assistant and proudly claiming Llama 3's progress. Amazon, on the other hand, hasn't even revealed its Rufus chatbot's artificial intelligence model.

So even if competitor Amazon decides to start using generative artificial intelligence to provide its shoppers with direct commercial messaging capabilities, it probably won't pose an immediate threat to Meta. We also need to consider the underlying model that supports the tech giants' respective chat features, because not all models are the same, and better artificial intelligence models can bring richer user experiences.

Currently, Meta seems to be in a better position than Amazon in terms of AI models, but it is worth noting that Amazon is developing a 2 trillion parameter LLM codenamed “Olympus” to try to catch up with competitors.

On the other hand, Google has also been providing click-to-message advertising solutions for merchants on its platform since 2016. Unlike Meta Platforms, however, Google hasn't discussed the popularity of this feature on its earnings call. Meanwhile, in Meta's earnings call for the third quarter of 2023, CEO Mark Zuckerberg shared:

In fact, in November 2023, YouTube launched an experimental, artificial intelligence-driven generative chatbot for premium subscribers in the US. This conversational artificial intelligence tool appears below the video and can be used to ask questions about the content and even ask it to recommend similar content.

Similar to Instagram and Facebook, YouTube is also evolving into a social commerce platform, with brands collaborating with YouTube creators to conduct endorsements and live stream shopping events. As a result, YouTube and Google are making extensive use of their LLMS (Large Language Model) to facilitate automated business communication between consumers and brands, which will challenge Meta.

Still, given that Zuckerberg's social media giant already offers the world's most popular messaging apps, Messenger and WhatsApp, it might be difficult for Alphabet to challenge Meta in this space. These two apps are already widely and habitually used for communication between friends and family. So, of course, they are also suitable for starting to be used for business communications.

Google, on the other hand, doesn't provide any meaningful competitive chat service for people to communicate with each other. In fact, YouTube introduced a chat service for users to communicate and share videos with each other in 2017, but the service was soon shut down in 2019, proving Meta's dominant position in social communication services.

In the first quarter of 2024, the Meta platform as a whole achieved strong revenue growth of around 25-26%, which was actually driven by app campaign revenue growth of around 26-27%.

The chart below compares Meta's app line ad revenue with the year-over-year growth rate of Google ad revenue and Amazon ad revenue.

Since the “Amazon Ads” segment is the smallest of the three advertising platforms and generated nearly $12 billion in revenue in the last quarter, it's not surprising that it achieved such a high growth rate. With this in mind, Meta's main ad segment generated $35.6 billion in revenue in the first quarter of 2024, growing even faster than Amazon's ad segment, and growing almost as fast in the previous two quarters.

This strong revenue growth was partly due to Meta finding a solution around Apple's 2022 iOS app tracking policy changes, which led to stronger year-over-year growth in 2023 after declining revenue in 2022. Emerging e-commerce companies in China, Temu and Shein have invested heavily in Meta's advertising solutions, and have also helped boost the social media giant's ad revenue over the past few quarters.

As far as stock valuations are concerned, Meta and Google shares are traded at a reasonable valuation of 23 times the expected price-earnings ratio. In terms of context, this is in line with Meta's 23x average expected price-earnings ratio of 5 times.

Although the forward price-earnings ratio does not take into account the company's future profit growth rate, it plays an important role in investors' decisions. That's why the forward price-earnings growth (PEG) ratio is a better way to evaluate a stock's valuation because it adjusts the forward price-earnings ratio based on the projected future earnings per share growth rate.

According to Seeking Alpha's growth rate forecast data, Meta, Google, and Amazon's EPS FWD long-term growth rate (3-5 year CAGR) is as follows:

Meta's earnings per share growth potential ranks second among the top three tech giants, and is not far from Amazon's projected earnings per share growth forecast, making Meta's 23.40x forward price-earnings ratio more attractive.

These growth predictions are now used to determine the forward PEG ratio for these stocks, in multiples as follows:

A forward PEG of 1 means the stock is trading at a fair value relative to future growth potential. Despite their popularity, technology stocks tend to trade above fair value. Still, the closer the forward PEG is to 1, the more attractive the stock's valuation is as an investment opportunity.

Meta's long-term PEG multiplier is the lowest among the three tech giants, at 1.11, which is far below its 5-year average long-term PEG multiplier of 1.52. From this perspective, Meta seems like an attractive investment opportunity.

Overall, in the era of artificial intelligence development, Meta has unique advantages over the other two advertising platforms. It has a clear direction of development, is good at seizing its own advantages, and has broad prospects, which are worthy of investors' focus. However, investing is risky. I think we can choose a more trustworthy brokerage firm to invest. For example, Schwab Wealth Management is a world-renowned investment brokerage firm. If you open an account with Charles Schwab Wealth Management, you can get a bank account with the same name. You can deposit digital currency (USDT) to the multi-asset wallet BiyaPay, and then withdraw fiat money to Jiaxin Securities to invest in US stocks. Of course, Xiaobian recommends that you first search for the Meta stock code on this platform, regularly monitor the stock price, select suitable opportunities, and then make the above investments.

Source: Seeking Alpha

Edited by BiyaPay Finance