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Alphabet (NASDAQ:GOOGL), Meta Platforms (NASDAQ:META), Pinterest (NYSE:PINS), Snap (NYSE:SNAP), and Reddit (NYSE:RDDT) all make most of their money the same way: They sell ads.
But they don't depend on ads equally. Advertising was around 64% of Alphabet's revenue in the third quarter, the smallest share of the five. Pinterest is at the other end, getting substantially all of its revenue from ads, with Meta close behind at about 98%.
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That gap matters now because ad growth slowed at all five from the second quarter to the third.
Google's ad revenue grew 11% year over year to $82 billion in the third quarter, down from 14% in the second quarter and around 16% in the first. Still, ads fell to about 64% of Alphabet's revenue, from 68% in the second quarter and about 72% a year before.
Google Cloud is the biggest reason. Its revenue more than doubled to $30.7 billion.
I think this makes Alphabet the easiest of these stocks to own if advertising slows more. And at around 19 times expected 2027 earnings, shares don't look pricey to me, either.
Meta Platforms' third-quarter revenue came to $64.6 billion, and $63.1 billion of that was advertising. Still, ad demand looks solid. Ad revenue climbed 26% year over year, almost matching the second quarter's 27% but down from 33% in the first. The source of this growth is changing, though. Ad impressions climbed 10%, down from gains of 14% and 19% in the two previous quarters, while the average price per ad went up 14%, after 12% in both of those quarters. Put simply, Meta is leaning more on charging more for every ad and less on showing more of them.
And that one revenue line has plenty to cover. Meta expects capital spending of $135 billion to $145 billion this year. At around 18 times expected 2027 earnings, I think shares look reasonably priced if ad growth holds up.
Pinterest doesn't list advertising as a separate line, and its annual report says it gets substantially all of its revenue from ads. That arguably makes it the most ad-dependent business here.
Third-quarter revenue climbed 12% year over year to around $1.17 billion, below management's $1.19 billion to $1.21 billion forecast and down from 18% growth in the second quarter. CEO Bill Ready said a pullback by cross-border sellers, after a change in European Union import rules, accounted for about 3 points of the slowdown. And its fourth-quarter forecast is for just 8% to 12% growth.
At around 8.5 times expected 2027 earnings on a non-GAAP (adjusted) basis, shares sound cheap. But third-quarter net income was only $22 million, down from $92 million a year before.
Snap's ad revenue rose just 4% to around $1.37 billion in the third quarter, down from 9% in the second quarter. CEO Evan Spiegel said ad growth "remains below our ambitions."
Other revenue, mainly subscriptions, jumped 84% to around $350 million, as paid subscribers crossed 30 million. That raised total revenue 14% to $1.72 billion and drove advertising down to around 80% of revenue, from about 87% a year before.
Even so, with ads still about 80% of sales, 4% ad growth might be a problem. And shares have fallen around 46% from their 52-week high.
Social media company Reddit had the highest ad growth of the five. Ad revenue rose 54% year over year to $847 million, or around 95% of total revenue. But that pace has come down from 74% in the first quarter and 64% in the second.
The bigger worry is the audience seeing the ads. Reddit said search referral traffic dropped meaningfully in the third quarter and that, if the trend keeps up, total daily users might fall by a low-double-digit percentage in the fourth quarter from around 130 million. Management sees fourth-quarter revenue of $1 billion to $1.03 billion, around 38% to 42% growth.
Shares sit about 64% off their 52-week high, at about 19 times earnings, but Reddit is paying almost no income tax for now.
Of the five, Alphabet and Meta are the two I'd consider buying now. Alphabet might hold up best if advertising cools, because Google Cloud is growing much faster than its ad business. Meta relies on ads almost entirely, but its ad revenue is still growing 26%, and around 18 times expected 2027 earnings feels like a fair price for that.
Pinterest sounds cheap on adjusted earnings, but I'd want to see its growth settle first. I'd want better than 4% ad growth from Snap. And I'd wait and see where Reddit's daily users land.
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Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Pinterest, and Reddit. The Motley Fool has a disclosure policy.
These 5 Internet Platform Stocks Run on Advertising Dollars was originally published by The Motley Fool
