Apple (AAPL 0.32%) and Meta Platforms (META 1.46%) generally aren't considered competitors. Apple generates most of its revenue from its hardware devices, and it locks in a lot of those users with its software and services. Meta generates most of its revenue from its ads on Facebook and Instagram.
Yet the two FAANG companies are gradually evolving into adversaries. After years of criticizing Meta's data-tracking practices, Apple finally disrupted Meta's ability to craft targeted ads with a privacy-oriented iOS update in late 2020. Apple also recently unveiled its first mixed-reality device, the Vision Pro, to challenge Meta's Quest headsets in the nascent metaverse market.
Image source: Apple.
The bulls overwhelmingly embraced Apple but shunned Meta over the past three years: Apple's stock surged 115%, but Meta's stock rose just 14%. Let's see why Apple outperformed Meta -- and if that trend will continue for the foreseeable future.
Why did the market embrace Apple?
Apple's growth is cyclical because it generates over half of its revenue from the iPhone. The iPhone's last major upgrade cycle occurred in fiscal 2021 (which ended in September 2021) after it finally entered the 5G market with the iPhone 12. Its growth cooled off in fiscal 2022 after it lapped that upgrade cycle and grappled with COVID-19 lockdowns in China.
NASDAQ: AAPL
Key Data Points
On the surface, Apple's growth seems tepid. Its revenue and EPS rose 8% and 9%, respectively, in fiscal 2022. In fiscal 2023, analysts expect its revenue and EPS to decline by 3% and 2%, respectively, as it struggles to sell more iPhones, iPads, and Macs. But all three of those hardware lines have bounced back from cyclical downturns before, and the arrival of the Vision Pro next year could light a fresh fire under its hardware business.
Furthermore, Apple's services division -- which houses Apple Music, Apple TV+, Apple Arcade, Apple Fitness+, the App Store, iCloud, and other services -- continues to flourish. It ended the second quarter of fiscal 2023 with 975 million paid subscriptions across all of its services, which represented 18% growth from the prior-year quarter.
The expansion of that prisoner-taking ecosystem ensures that Apple's hardware sales will climb again after the near-term macro headwinds pass. It's also still sitting on $166 billion in cash and marketable securities, which gives it plenty of room to make fresh investments and acquisitions, and it just authorized a new $90 billion buyback plan. It bought back nearly 40% of its shares over the past decade, and it's raised its dividend every year since it reinstated those payments in 2012.
However, Apple's forward yield of 0.5% is still paltry compared to other blue chip tech stocks, and its stock isn't a bargain at 27 times forward earnings. That valuation was likely inflated by its reputation as a safe haven stock over the past year.
Why did the market shun Meta?
Meta's revenue and EPS fell 1% and 38%, respectively, in 2022. That slowdown was caused by three main challenges: Apple's iOS update, intense competition from ByteDance's TikTok, and macro headwinds for the digital ad market.
NASDAQ: META
Key Data Points
Meta has been tweaking its advertising algorithms to reduce its dependence on third-party data to counter Apple's iOS changes. It's also been aggressively expanding its short video platform Reels to counter TikTok. However, both of those strategies could be difficult to execute in this challenging macro environment.
But at the same time, Meta is burning billions of dollars on its Reality Labs division, which houses its virtual reality devices. That segment only generated $2.2 billion in revenue last year (2% of its top line) but racked up an operating loss of $13.2 billion. It expects the unit's losses to widen again this year as it prepares for the launch of its Quest 3 VR headset this fall.
The bears believe those losses will continue to compress Meta's operating margins as it struggles to turn around its core advertising business. However, the bulls will point out that Meta still reaches 3.81 billion people each month with its "family of apps" (Facebook, Messenger, Instagram, and WhatsApp) -- so the growth of its advertising business could easily accelerate again once its resolves its near-term problems. Its aggressive investments in the metaverse could also eventually pay off as more of its social media users migrate to its virtual reality ecosystem.
Meta is still firmly profitable and ended the first quarter of 2023 with $41 billion in cash, cash equivalents, and marketable securities, and it bought back about 10% of its shares over the past three years. Analysts expect Meta's revenue and earnings to grow 8% and 36%, respectively, this year, as the growth of its advertising business offsets its metaverse spending. Those are impressive growth rates for a stock that trades at 22 times forward earnings.
The winner: Meta
I own both of these FAANG stocks, and I don't plan to sell either one anytime soon. But if I had to buy more shares of one of these stocks right now, I'd pick Meta over Apple for three simple reasons: It's growing faster, its valuations are lower, and it still reaches nearly half of the world's population with its apps. Apple is still a rock-solid investment, but its valuations are a bit too high relative to its near-term growth potential.
