Why AI is boosting Meta's ad business while hurting Google search

In the third quarter , Meta's ad business grew more than twice as quickly as Google's Search and other unit, backing up Mark Zuckerberg's claim that his company's investments in artificial intelligence are leading to better targeting tools for brands to promote goods and services across Facebook and Instagram.

"It's a double-edged sword, because as AI revolutionizes discovery, people might come across tools they like better than Google," Nate Elliott, an analyst covering AI at Emarketer, told CNBC in an email. "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 ad revenue increased 26% in the quarter from a year earlier to $63.1 billion, compared to 12% growth for Google's search division, which brought in $63.4 billion. That 14-point growth gap is the widest in Meta's favor since 2021, and it puts the two businesses neck and neck by size, though Google got an additional $11 billion in third-quarter revenue from YouTube.

Following its disappointing third-quarter earnings report on Wednesday, Alphabet had its worst day ever on the stock market, plunging more than 12% and wiping out about $500 billion in market cap. Meta isn't exactly a Wall Street darling at the moment either, as the stock fell 14% in October for its worst month since October 2022. That followed a 27% surge in September, which was its best month since November of that year.

Investors' reactions reflected market jitters surrounding the companies' AI buildouts, which have pushed both businesses into negative free cash flow territory. Questions are swirling about whether their historic levels of spending on AI infrastructure will result in sufficient revenue.

Late 2022 brought the launch of OpenAI's ChatGPT and ushered in a new era of generative AI technology. While Meta struggled initially to find a consistent AI strategy, falling far behind OpenAI and Anthropic in developing frontier models, the company has successfully infused AI into its ad products, giving brands advanced tools for efficiently reaching users.

Google has a similar opportunity with AI in ad products across its properties, including YouTube.

However, Google's search engine is competing directly with ChatGPT and Claude by surfacing more results through AI Overviews and AI Mode, where users primarily get summaries rather than links to other sites. Search queries increased to a record in the quarter, Google said, but revenue growth is slowing.