Alphabet's Unrealized Gains Distort P/E Comparison with Meta

Alphabet's stock price has gained an apparent valuation advantage, but it's crucial to look beyond this surface-level comparison. On Monday morning, Alphabet shares were trading at $339.59, a 1.2% increase from Friday's close, while Meta was up 1.8% at $659.57.

The real distortion lies in Alphabet's latest earnings, which included a massive $99.03 billion gain on equity securities. This primarily consists of unrealized gains tied to SpaceX and another private company, pushing net income to $112.11 billion and diluted earnings per share to $9.11.

A simple price-to-earnings comparison would make Alphabet's stock seem cheaper than it actually is. However, if we focus on operating profit rather than headline EPS, a different picture emerges. Alphabet's underlying quarter was strong, with revenue rising 24% to $119.80 billion and operating income increasing 30% to $40.77 billion.

Meta, on the other hand, grew faster at the top line but failed to convert that growth into higher operating profit. Its revenue climbed 28% to $60.80 billion, while operating income fell 8% to $18.78 billion and the margin contracted to 31% from 43%. Alphabet's cloud infrastructure segment, Google Cloud, showed unusually rapid growth of 82%, more than tripling its operating income to $8.81 billion.

The comparison between Alphabet and Meta is often skewed by their different business mixes. Alphabet has a cleaner business mix and lower quarterly capital expenditure burden relative to revenue, which are real advantages. However, these benefits do not automatically make its stock cheaper.