Google and Facebook have been dominant internet brands for the past two decades, turning billions of eyeballs into trillions in advertising dollars over that stretch. But with the ChatGPT era altering how consumers engage online, the companies are diverging.
In the third quarter , Meta's ad business grew more than twice as quickly as Google's Search and other unit, backing up Mark Zuckerberg's claim that his company's investments in artificial intelligence are leading to better targeting tools for brands to promote goods and services across Facebook and Instagram.
Google's problem is that chatbots are becoming an alternative to search, leading consumers to do a lot less clicking on blue links, and thus hurting Google's ad revenue. Anthropic's Claude chatbot and Meta's recently launched Muse assistant are adding to the mix of options. Meanwhile, users are spending more time scrolling on Instagram, giving Meta more advertising opportunities.
"It's a double-edged sword, because as AI revolutionizes discovery, people might come across tools they like better than Google," Nate Elliott, an analyst covering AI at Emarketer, told CNBC in an email. "If ChatGPT or Claude or Muse is better at helping them find what they're looking for, people's search habits might change for the first time in a generation. That's potentially catastrophic for Google's ad business."
Meta's ad revenue increased 26% in the quarter from a year earlier to $63.1 billion, compared to 12% growth for Google's search division, which brought in $63.4 billion. That 14-point growth gap is the widest in Meta's favor since 2021, and it puts the two businesses neck and neck by size, though Google got an additional $11 billion in third-quarter revenue from YouTube.
Following its disappointing third-quarter earnings report on Wednesday, Alphabet had its worst day ever on the stock market, plunging more than 12% and wiping out about $500 billion in market cap. Meta isn't exactly a Wall Street darling at the moment either, as the stock fell 14% in October for its worst month since October 2022. That followed a 27% surge in September, which was its best month since November of that year.
Investors' reactions reflected market jitters surrounding the companies' AI buildouts, which have pushed both businesses into negative free cash flow territory. Questions are swirling about whether their historic levels of spending on AI infrastructure will result in sufficient revenue.
In the meantime, both Meta and Google are aggressively trying to diversify their revenue streams. Meta, which still counts on ads for nearly all of its revenue, is pouring money into AI models and agents with an aim to start building a subscription business . Google already has a large and rapidly expanding cloud computing division that just reported over 100% growth to $31 billion in quarterly revenue, driven by demand for its infrastructure and its custom AI chips called tensor processing units, or TPUs.
The boon in online advertising, and the hefty margins that come along with it, catapulted the two companies into leadership positions and brought their market caps into the trillions.
Meta needed AI to breathe life into its ad business after Apple's iOS privacy change in 2021 severely limited the company's ability to target users on iPhones. The following year, revenue at Meta fell for the first and only time in the company's history.
Late 2022 brought the launch of OpenAI's ChatGPT and ushered in a new era of generative AI technology. While Meta struggled initially to find a consistent AI strategy, falling far behind OpenAI and Anthropic in developing frontier models, the company has successfully infused AI into its ad products, giving brands advanced tools for efficiently reaching users.
A year ago, the company unveiled the Meta AI business assistant, which advertisers can plug into the Ads Manager system to help build campaigns and improve performance. Meta CFO Susan Li said on the earnings call last week that advertisers adopting the system's recommendations "drove almost 5% more conversions" and "increased their advertising investment by 9% compared with similar non-adopters."
Li gave the example of syrup producer Simply Organic Maple, and said the company, in using the assistant, saw a 57% increase in purchases and 36% decrease in cost per purchase. She added that in the third quarter, almost 10 million advertisers used at least one of its AI tools.
Google has a similar opportunity with AI in ad products across its properties, including YouTube.
Philipp Schindler, Google's chief business officer, said on the earnings call that the company is deploying its Gemini models "across our entire ads infrastructure," adding tools for advertisers and improving ad quality.
However, Google's search engine is competing directly with ChatGPT and Claude by surfacing more results through AI Overviews and AI Mode, where users primarily get summaries rather than links to other sites. Search queries increased to a record in the quarter, Google said, but revenue growth is slowing.
"That's going to bring Search cannibalization fears right back to the forefront, made worse by META's ad strength this quarter and the lingering Muse/agent threat," analysts at UBS wrote in a note after Google's results.
Both companies are so bullish on the potential of AI that they're pumping hundreds of billions of dollars into the infrastructure needed to build new models and services. Google is projecting up to $205 billion this year in capital expenditures, while Meta expects to spend up to $145 billion.
Advertising remains key, but they're both investing for a future that could look very different. Google is much further along when it comes to diversifying, as ads now account for less than two-thirds of its revenue, while Meta still counts on ads for 98% of sales.
Still, analysts at Wedbush see search monetization at Google as critical to the investment thesis.
"GOOGL shares are unlikely to work until the search narrative changes," the analysts wrote in a report on Thursday. "And it will likely require new ad products and proof points that it can monetize in the evolving AI era as it did in the past."
—CNBC's Jonathan Vanian and MacKenzie Sigalos contributed to this report.
WATCH: Alphabet earnings miss reflects first real sign AI is taking a bite out of search
