While Facebook Inc (NASDAQ:FB) has been increasing its capital budget and becoming even more dependent on advertising on its free social services over the last year, a curious thing has happened at rival Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).
The house of Google has been quietly moving away. Or as quietly as a company with $100 billion in revenues can move.
Google Plus, its social network, has been allowed to wither. Google News was never monetized. Google Finance was recently eviscerated in a “redesign” that managed to render it useless as an analysis tool.
Google now sells a wide range of physical products, most imported from China. Google Shopping has been dramatically upgraded, with allies like Walmart Inc (NYSE:WMT) and Target Corporation (NYSE:TGT) tying loyalty programs to it, and a universal shopping cart.
Now Google wants to get newspapers paid through Google Subscribe, which will identify potential subscribers, collect their money, and pass it on to participating publishers.
One more thing. Google Pay is going into all its products and services, aiming to become a rival to Amazon’s own credit card, which is produced with JPMorgan Chase & Co. (NYSE:JPM). Google Assistant on your Google speaker will remind you of when bills need to be paid, and handle that.
While critics warn darkly that this is all aimed at getting your personal information, it’s mainly a way to get into information-based commerce, and quickly, whether through a watch, a phone or a speaker. It’s as if the company has done a 180-degree-turn.
Meanwhile, Facebook finds itself alone. As I wrote before, after the current Cambridge Analytica scandal blew up, Facebook is uniquely vulnerable to user backlash. Its entire business model is based on goodwill and being paid for that goodwill through advertising.
Despite what Wall Street now seems to think, social networking is not a necessity. Yes, some people may “boycott” Facebook by using Instagram, and Instagram is owned by Facebook, but Instagram isn’t vital, either. The WhatsApp Messenger has tons of competition, and its connection to users is also tenuous.
Facebook has dramatically ramped up spending on cloud data centers, recently holding a ground-breaking center near Atlanta, but Facebook doesn’t re-sell cloud capacity and it doesn’t have any products to speak of. It’s spending like Exxon Mobil Corporation (NYSE:XOM), but it has no more connection to consumers than CBS Corporation (NYSE:CBS).
When Will Investors Notice
Since the scandal broke, Facebook and Alphabet shares have been falling almost in lockstep with one another, with Facebook now down 10% for the month and Alphabet down 6.6%. But people are still going to look things up online. People don’t have to share pictures of their puppies.
Facebook’s goodwill-based business model has made it uniquely vulnerable among the “Cloud Czars,” the companies that represent half of the cloud center data market. Apple Inc. (NASDAQ:AAPL) makes products, Amazon sells stuff, Microsoft Corporation (NASDAQ:MSFT) does software. Only Facebook is entirely supported by advertising, and none of its services are necessary in your daily life.
This is not like the Target breach, or the breach at Equifax Inc. (NYSE:EFX). You will shop, you must have a credit report. You don’t need what Facebook does.
A lot of InvestorPlace writers would say that you sell Facebook options and buy Alphabet options against them. I’m not that sophisticated. I would only suggest that you look for a buying opportunity in Alphabet and don’t touch Facebook until there’s evidence its public image has changed for the better.
Or until it buys an asset that can fill those data centers with traffic, like IAC/InterActiveCorp (NASDASQ:IAC), which I recently wrote about, or AT&T Inc. (NYSE:T), which still has less than one-half its market cap.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, T and MSFT.