Buy Better: Apple vs. Alphabet

Apple (NASDAQ: AAPL) and Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) have each innovated to rise to the top of the tech industry. This success has brought huge returns to their long-term investors. While both companies are expected to continue to grow, determining which of these tech stocks might make the best investment comes down to one intangible factor: Apple and Google’s ability to capitalize on their innovations.

What attracts customers to each business

Although Apple ditched the “think outside the box” slogan years ago, this mindset has long defined the company and its innovations, leading to successful products like the iPhone. Today, its smartphones and other products look set to spur growth.

Still, no one can deny Alphabet’s innovative prowess. Its dominance of search and video sharing has spawned a lucrative internet advertising industry that today generates most of the company’s revenue.

Although they have followed different paths, the two companies have become competitors in certain areas, particularly operating systems for mobile devices. Apple’s iOS and Alphabet’s Android dominate this part of the industry. According to Statcounter, Android controls around 72% of the market, while iOS claims just over 27%.

Innovation leadership

Despite Android and its other companies, Alphabet still relies heavily on ads. Today the company faces increasing advertising competition Facebook and Amazon. According to eMarketer, it retains about 29% of the digital advertising market in the United States, up from 32% last year. While this is a good reason for Alphabet to innovate and branch out from Google, the search engine and associated operations, including YouTube, still account for over 99% of the company’s revenue. Additionally, Google Cloud revenue is the only Google business separate from Google’s advertising-related parties, giving investors little visibility into the specific segments that are driving revenue growth.

Additionally, potential value not reflected in Alphabet’s financials should be of concern to investors. The Financial Times estimated the value of Waymo, Alphabet’s self-driving car unit, at $ 30 billion, or just under 13% of Alphabet’s $ 201.4 billion book value. This estimate doesn’t even apply to Sidewalk Labs, Verily Life Sciences, Calico, Fiber, or Alphabet’s many other companies.

Yet, according to the company, all non-Google businesses generate less than 1% of the company’s revenue. Certainly, the business can include income from some of the aforementioned divisions under the umbrella of Google. However, even in the best case scenario, the average investor has no visibility on how much or how much these companies contribute to revenue and profits.

Apple has also been breaking new ground in recent years, particularly with an iPhone 5G, Apple Silicon processors, its booming subscription-based business, and the health monitoring features of the Apple Watch. However, Apple reveals more explicitly than Alphabet how it monetizes innovation, breaking down its revenue across each of the different companies and product lines it pursues. Therefore, we know that all product categories such as iPhone, iPad, services and wearable devices are currently increasing their revenue at double digit rates.

Financial results

Giving investors more information about the value that its various companies create may explain why Apple far outperforms Alphabet in terms of market capitalization. Its $ 2.3 trillion valuation is roughly 65% ​​above Alphabet’s $ 1.4 trillion.

Granted, Alphabet has been growing faster recently, mainly due to Google Cloud’s 46% revenue growth over the past 12 months. Alphabet reported more than $ 182.5 billion in net sales, up about 13% from the previous 12-month period. That compares to Apple’s $ 294.1 billion in sales – much higher overall than Alphabet’s, but only a 10% increase over the same period. In addition, Alphabet recorded a growth in its net profit of 17% against 11% for Apple.

Nonetheless, Alphabet achieved higher revenue growth largely by reducing its sales and marketing expenses and slowing the growth in research and development costs. In contrast, Apple’s operating expenses generally increased with the increase in revenue, with research and development increasing by more than 16%. The alphabet cannot reduce these costs forever and hope to remain competitive. Therefore, this is probably not as much of an advantage for Alphabet as it seems.

In addition, the size of each company’s cash treasury indicates better long-term performance of Apple. Although Apple recently tapped into the debt market, it could get by without borrowing. Apple holds nearly $ 196 billion in cash and cash equivalents. While Alphabet’s nearly $ 137 billion in cash and the like puts it in an equally stable position, it still lags Apple in this area.

Investors have come to appreciate this advantage. Apple sells 37 times its profits compared to Alphabet’s P / E ratio of around 35. Nonetheless, Alphabet was historically the most expensive stock. Just two years ago, Apple’s P / E ratio was around 13, while Alphabet’s was in the 25 range.

Growing demand for tech products amid the pandemic along with new Apple technologies such as the iPhone 5G, Apple Watch and the Apple silicon chip have likely helped drive demand for Apple stocks. This multiple expansion has allowed Apple to stock nearly double the returns of Alphabet shares over the past 12 months.

AAPL data by YCharts

Why I choose Apple

Both companies encourage innovation and hold enough cash to control their fate. However, while Alphabet invests heavily in new technology, it has not monetized its inventions well or, at the very least, refused to communicate these results to investors.

Conversely, Apple capitalized on the iPhone, Apple Watch, and other inventions and reported these results more explicitly. Such transparency makes Apple an easier choice. Until Alphabet can figure out how to unlock and further reveal its potential value, I think investors should continue to bite into Apple.