The advertising business of the two giants ushered in a “watershed moment”! AI achieves Meta (META.US) but Google (GOOGL.US) searches for a “tight spell”

The Zhitong Finance App learned that over the past 20 years, Google (GOOGL.US) and Facebook, a subsidiary of Meta (META.US), have dominated the Internet, turning the attention of billions of people into trillions of dollars in advertising revenue. The boom in the online advertising business and the resulting lucrative profit margins have propelled these two companies into the position of industry leaders and propelled their market capitalization to the trillion-dollar level.

However, as the artificial intelligence (AI) era changes the way consumers interact online, Google and Meta advertising business are showing a very different trend: AI is helping Meta improve advertising efficiency and expand commercialization opportunities, but it may be weakening the traditional search advertising model that Google relies on to survive.

According to the data, Meta's advertising revenue increased 26% in the third quarter to reach US$63.1 billion, up from US$50.1 billion in the same period last year. In contrast, Google's search division's revenue grew 12% to reach $63.4 billion. This 14 percentage point growth gap is Meta's biggest lead compared to Google since 2021, and has also kept the two businesses almost equal in size.

This performance confirms Meta CEO Mark Zuckerberg's previous judgment that Meta's investment in AI is providing brands with better targeting tools to help advertisers promote products and services more accurately and efficiently on Facebook and Instagram.

In fact, Meta's bet on AI didn't happen overnight. After Apple made adjustments to the iOS privacy policy in 2021, Meta's ability to target iPhone users was severely limited. The following year, Meta's revenue declined for the only time in the company's history. In this context, Meta urgently needs to find new technical means to restore the growth momentum of the advertising business.

At the end of 2022, OpenAI launched ChatGPT, opening a new era of generative AI technology. Although Meta initially struggled to find a stable AI strategy and fell far behind OpenAI and Anthropic in developing cutting-edge models, the company then successfully incorporated AI into its advertising products, providing brands with more advanced tools to reach users more efficiently.

A year ago, Meta launched Meta AI commercial assistant, which advertisers can connect to the Ads Manager system to help develop advertising campaigns and improve results. Meta's chief financial officer Susan Li said during the earnings call last week that advertisers who adopted the proposed system “increased conversions by nearly 5%” and “increased their advertising investment by 9% compared to similar non-adopters.”

Using syrup manufacturer Simply Organic Maple as an example, Susan Li said that after using this assistant, the company increased its purchase volume by 57% and the cost per purchase decreased by 36%. She added that nearly 10 million advertisers used at least one of Meta's AI tools in the third quarter.

As AI continues to be integrated into advertising systems, Meta has also gained an important advantage: the time users spend on its platform is itself an asset that can be commercialized. In contrast, the problem facing Google is that chatbots are becoming an alternative to traditional searches, which may cause consumers to click on blue links drastically, putting pressure on Google's search advertising revenue.

Nate Elliott, an analyst in charge of AI research at eMarketer, said, “This is a double-edged sword because as AI completely changes the way information is discovered, people may be exposed to tools that are more suited to their needs than Google. If ChatGPT, Claude, or Muse are better at helping users find the information they need, then people's search habits may change for the first time in a generation. This could be disastrous for Google's advertising business.”

Of course, Google is also actively using AI to improve its advertising business and is trying to benefit from this technological transformation. Google has AI application space in advertising products in all of its businesses, including YouTube.

Google's chief commercial officer Philipp Schindler said during the earnings call that the company is “deploying the Gemini model across our entire advertising infrastructure” and adding tools for advertisers while improving ad quality.

However, unlike Meta, AI is not only Google's tool to improve advertising efficiency, but is also directly changing its core search business. Google's search engine is directly competing with ChatGPT and Claude through AI Overview and AI Mode. Among these features, users mostly get summaries rather than links to other websites.

Google said the number of search queries hit a record high this quarter, but revenue growth is slowing down. This means that even if users are still using Google search a lot, changes in AI-driven search methods may change the way users interact with search results and advertisements.

UBS analysts wrote in a report after the release of Google's earnings report: “This will once again push concerns about the encroachment of the search business into the spotlight, and Meta's strong advertising performance this quarter and the ongoing threat posed by Muse/Smart has further exacerbated these concerns.”

In this context, both companies are betting on AI on an unprecedented scale. Both companies are extremely optimistic about the potential of AI, and are therefore investing hundreds of billions of dollars in the infrastructure needed to build new models and services. Google expects capital expenditure of up to $205 billion this year, while Meta expects to invest up to $145 billion.

Such huge capital investment has also begun to raise investors' concerns about the ability to return. After Google released its disappointing third-quarter earnings report on Wednesday, the stock price experienced the worst single-day performance in history, plummeting more than 12%, and the market value evaporated by about 500 billion US dollars.

However, Meta isn't currently Wall Street's darling either. The company's stock price fell 14% in October, the worst monthly performance since October 2022. Previously, Meta's stock price soared 27% in September, the best monthly performance since November of that year.

Investors' reactions reflect market concerns about the two companies' huge AI spending. This type of expenditure has already pushed the free cash flow of the two companies into a negative range, and the market is currently full of questions: can the two companies' historic spending on AI infrastructure ultimately generate sufficient revenue and profits.

Meanwhile, both Meta and Google are actively seeking to diversify their revenue streams. Currently, Meta still relies on advertising for almost all of its revenue, so it is investing heavily in AI models and agents to build a subscription business. Google, on the other hand, already has a large-scale and rapidly expanding cloud computing business. The business has just announced quarterly revenue of 31 billion US dollars, an increase of more than 100% over the previous year, mainly driven by demand for its infrastructure and customized AI chips called tensor processing units (TPUs).

However, judging from the revenue structure, there is still a clear difference in the degree of dependence between the two companies on the advertising business. Google has gone further in terms of revenue diversification. Currently, advertising revenue accounts for less than two-thirds of total revenue, while Meta still relies on advertising for 98% of its sales.

So while AI has brought new growth opportunities to both companies, its impact is not exactly the same. For Meta, AI is more reflected as a tool to improve advertising accuracy, improve conversion efficiency, and further explore user time; for Google, AI is not only a technical means to optimize the advertising business, but also a disruptive force that may change the traditional search business model.

This also means that the success or failure of the two companies' AI strategies in the future depends not only on whether they can continue to increase investment in AI infrastructure, but also on whether these investments can be effectively converted into sustainable commercial revenue.

Despite this, Wedbush analysts believe that the monetization capacity of Google's search business is still the key to its investment logic. The bank's analysts wrote in a report last Thursday: “Until the narrative of the search business changes, it will be difficult for Google's stock price to actually strengthen. This may require launching new advertising products and proving that companies can monetize in the evolving AI era, just like in the past.”