Meta’s AI boost outpaces Google’s search growth, sparking market concerns

Meta’s advertising revenue experienced a significant surge in the third quarter, growing more than double the rate of Google’s Search and other unit. This growth, exceeding 26% to reach $63.1 billion compared to Google’s 12% growth, validates Mark Zuckerberg’s strategy of investing in AI to enhance ad targeting capabilities across Facebook and Instagram.

Google faces a challenge as AI-powered chatbots like Anthropic’s Claude and Meta’s Muse assistant offer alternatives to traditional search, reducing user clicks on standard search results and impacting ad revenue. Users are increasingly spending time on Instagram, providing Meta with additional advertising opportunities.

“It’s a double-edged sword, because as AI revolutionizes discovery, people might come across tools they like better than Google,” noted analyst Nate Elliott of Emarketer. “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 14-point growth advantage marks the widest gap since 2021, bringing the two businesses close in size, although Google generated an additional $11 billion in revenue from YouTube during the same period.

Following Wednesday’s disappointing earnings report, Alphabet experienced its worst trading day ever, with a plunge of over 12% and a loss of approximately $500 billion in market capitalization. Meta’s stock also declined, falling 14% in October, though it followed a 27% surge in September.

Investor reactions reflect concerns about the financial impact of the companies’ substantial AI investments, which have resulted in negative free cash flow. Questions remain regarding whether these investments will yield sufficient revenue.

Both companies are actively diversifying their revenue streams. Meta, heavily reliant on advertising for nearly all of its income, is investing in AI models and subscription services. Google, with a rapidly expanding cloud computing division reporting over 100% growth to $31 billion, is leveraging infrastructure and custom AI chips known as tensor processing units (TPUs).

The boom in online advertising previously propelled both companies to trillion-dollar valuations.

Meta utilized AI to revitalize its ad business following Apple’s iOS privacy changes in 2021, which severely limited ad targeting on iPhones. This led to Meta’s first and only revenue decline in 2022.

The launch of OpenAI’s ChatGPT in late 2022 ushered in a new era of generative AI. Meta has since integrated AI into its ad products, including the Meta AI business assistant, which advertisers can use to optimize campaigns. Susan Li, Meta’s CFO, reported that advertisers using the assistant saw a 5% increase in conversions and a 9% increase in advertising investment. One syrup producer, Simply Organic Maple, experienced a 57% increase in purchases and a 36% decrease in cost per purchase.

Google is also deploying its Gemini models across its advertising infrastructure, aiming to improve ad quality. However, the company is directly competing with ChatGPT and Claude by integrating AI Overviews and AI Mode into its search engine, which provides users with summaries instead of links. While search queries reached a record high, revenue growth is slowing.

Analysts at UBS noted that Google’s search monetization is crucial to its investment thesis, adding, “GOOGL shares are unlikely to work until the search narrative changes.”

Both companies are investing heavily in AI infrastructure, with Google projecting up to $205 billion in capital expenditures this year and Meta anticipating spending up to $145 billion. Advertising remains a primary revenue source, but both companies are preparing for a potentially transformed future.