Is Apple a Better Stock Than Google?

As John Paczkowski at All Things Digital has noted, Apple’s (AAPL) market capitalization passed Google’s (GOOG) yesterday, closing at $158.8-billion to Google’s $157.2-billion (as Senator Everett Dirksen is reported to have said, “a billion here and a billion there, pretty soon you’re talking real money”).

Of course, as my friend Paul Kedrosky notes, Apple’s market value has eclipsed Google’s (albeit briefly) several times in the past year. Will this one last? Google’s business is arguably under more pressure as a result of the weaker U.S. economy and advertising market, but then Apple could always stumble (yes, friends, it could happen).

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It’s become so commonplace now to think of Apple as a consumer products star — given the success of the iPod, iTunes and the iPhone — that I think we sometimes forget how far this company has come in just the past four or five years. Google has grown a phenomenal amount in that same span of time, with a share price that has increased five-fold, going from $100 to the current $500 level, and revenues that are now at $20-billion.

Apple, however, makes Google’s growth look almost anemic by comparison: its shares have grown 10-fold, from about $16 to more than $170 at their current level, and revenue is at $30-billion.

So who makes for a better bet? If you’re looking for growth prospects, you could argue that Apple has better odds, simply because it is still a relatively small player in the PC market and the iPhone is just getting started as a consumer product. Google, meanwhile, already dominates the online search-related advertising market to the point where huge amounts of future growth could be difficult — and so far none of its side projects are really paying off that well.

From a stock point of view, Apple’s shares are trading at higher multiples than Google’s in most cases (price/earnings ratio, price to book value, etc.) but Google’s profitability exceeds Apple’s, with a profit margin of 25 per cent to Apple’s 15 per cent, and an operating margin of 30 per cent to Apple’s 19 per cent. Apple has more cash on hand, with $20-billion — administered through a special in-house investment fund based in Nevada, someone told me recently — while Google only has about $13-billion (only!), but a bunch of money sitting around isn’t really worth all that much from an investment point of view.

In the end, it comes down to who you think has the best chance for growth: the king of online search and online advertising, or the company that has managed to transfer its legendary coolness factor and design sense from computers to digital music players and now cellphones?

Disclosure: None

Comments

[Network Effect:]

Apple's historical earnings have nothing to do with their future value. That's the point - people realize that the iPhone is yet another monster revenue and profit generator for Apple that is another inflection point in the companies growth. The trend line is not straight, it is turning upwards. With Google, it's the opposite. This is why Apple is worth more, a better company, a better business model, just about a better everything than Google. Google is turning out to be the one trick pony that many feared, and the metrics in that stellar business are headed in the wrong direction. Average cost per click should drop quite a bit over the next couple years. Click through rates should drop. There are chinks in their armor. Apple is just the opposite - they are firing on unprecedented cylindars.

2008 Aug 14 09:30 AM

[mcadoo3312:]

Google has positioned itself in many different internet and technology areas, but they have yet to find a way to make those profitable. As soon as they discover this, they will surpass Apple, especially if another company is able to disrupt Apple's current products.

2008 Aug 14 09:32 AM

[Upperman33:]

The internet is still growing rapidly around the world and Google is going to benefit tremendously from that. They expect int'l revenue to grow to 65% of sales (it is currently somewhere around 50%). Not to mention Youtube, which has already had a cultural impact in this country and will continue to grow. Add in Android, their platform for mobile phones and I think that Google has excellent long term prospects. With the types of people that Google hires, they will always be innovating and at the forefrunt of internet revolution.

2008 Aug 14 09:36 AM

[brewer:]

Six months ago, no one would acknowledge that Apple was even growing their computer business. Now, no one can deny it. Apple laptops are sprouting out everywhere like iPod headphones.

At their current rate of marketshare growth, Apple could rival Microsoft in desktop share in 18 months. And Microsoft has NOTHING in the cellphone, MP3 player, internet music/video/NOW SOFTWARE!, or RETAIL segment.

Google is a great internet company, but I agree that they are a 'one trick pony' (good trick though) and pretty settled at this main job of internet search. I think Google documents is excellent but I don't see how they will market it besides using advertising (which may be enough, but won't yield the cash MS has milked from Office all these years. Google keeps talking about the gPhone, but I think it will be a huge failure compared to the iPhone which will practically own the market for smartphones by the time the gPhones start to come out. And from the looks of it, the gPhone will be a clunker of a device, next to an iPhone. Music is very important to so many people--who doesn't want iTunes integration with their phone or MP3 player? We shall see.

Mostly, I am glad that Google and Apple get along so well, they both support open standards, and cooperate on many projects.

2008 Aug 14 09:51 AM

[turkeyeyes:]

I wouldn't brag about :...my friend Paul Kedrosky...". That guy is an Apple basher and has not written positively about Apple. He puts forth unsubstantiated drivel as fact. Hey, well I guess you're judged by the company you keep. Keep up the hard work.

2008 Aug 14 09:52 AM

[Bruman:]

Do these companies have similar capital structures?

2008 Aug 14 10:05 AM

[Channon:]

Past growth comparison is silly; Apple was significantly undervalued at a time when many thought it wouldn't be a going concern. Why not compare that period of Apple to Google when it was just Brin/Page's paper at Stanford. From an idea to $500/share is infinite growth, which it doesn't take a mathematician to tell you is a lot more impressive than 10-fold growth.

Looking forward, they both have tremendous growth potential internationally, hence the high P/E. Perhaps Google has less growth potential, but it also has less competition and better margins. Google has a more attractive PEG ratio.

Instead of this inane debate, why not own both stocks? There are not many companies right now that even have foreseeable growth potential!

2008 Aug 14 10:42 AM

[sgmsg:]

How Android can generate revenue for Google?

I read lot of time that Android gonna help Google to enlarge their revenues and avoid the crash on PC market advertising but I really dont know how. Android is freesource anybody can use it. Google can advertise yet on Iphone. So I' m lost... Or Google is lost...

2008 Aug 14 10:50 AM

[Vox Rationalis:]

"From a stock point of view, Apple’s shares are trading at higher multiples than Google’s in most cases (price/earnings ratio, price to book value, etc.)..."

What about cash flow? You don't mention that at least half of iPhone revenues are deferred to later FYs, which means that earnings aren't fully reflective of profitability.

"...a bunch of money sitting around isn’t really worth all that much from an investment point of view."

I'm sure Warren Buffett would be interested to learn this.

2008 Aug 14 10:58 AM

[disposablei...:]

Google does indeed seem to be a one-trick pony.

They are a very talented bunch, but don't have any vision for where to take us in the future. They have no culture of developing and shipping tight, complicated products that people want to use (they're all about throwing stuff out there and seeing what sticks).

Everyone assumed they were "a high-tech company's high-tech company". Maybe (and it's not necessarily a bad thing) they are the 21st century's first blue-chip. A Yellow Pages for the next several generations.

2008 Aug 14 11:58 AM

[disposablei...:]

Oops. I guess Google did ship Google Earth, and that may one day change the world. But can they capitalize on it?

Apple on the other hand has the vision, talent, IP, and track record for shipping the kinds of products the world wants. They consistently add new product lines that bolster each other and creating cohesive systems. More and more they are building products and systems that cannot be duplicated because they span a unique collection of fields that no one else has competencies in (hardware, software, OS, media, retail, servers, online sales, content delivery, wireless, user interface, industrial design, consumer marketing). These are the raw ingredients it will take to build the high-tech consumer products of the 21st century.

They also know how to sell their ideas to the public. And they know enough to put margins before volume.

I don't see any of that changing any time soon.

2008 Aug 14 12:16 PM

[Shorting Sh...:]

My 2cents..... Apple has evolved from a 2 cylinder motor cycle thru a 4 cylinder sedan to a six cylinder upscale sedan, and is on its way to being an 8 cylinder performance vehicle.
Cylinder is, of course, a metaphor for Line of Business

2008 Aug 14 12:23 PM

[obama is a ...:]

Google can't advertise on the iPhone the way it could advertise on it's own Gphone (using Android like others). The iPhone is too locked down for Jobs to allow a monopoly of advertising from Google. Better for Google to have a strategy on a separate platform, which is not to not use Apple's platform as well.

2008 Aug 14 12:58 PM

[sgmsg:]

@bluezz

Ads on internet are close to be unsurpotable. If Android is use to increase that. Who gonna want an Android phone? Doesn't look good for Google.

2008 Aug 14 01:06 PM

[sgmsg:]

Ads on Android seem to me like Seagram and Jean-Marie Messier

2008 Aug 14 01:47 PM

[Anonymous W...:]

Dollar for Dollar, I've said for many years now ( AAPL Long since 2000 ) , I'd rather buy AAPL than Google. It's been speculated that Apple hasn't split shares to get to the GOOG share price prestige. Maybe it's AAPL that should be in the $500+ range. That's where I've always seen it headed or beyond one way or another. Think of it this way, Apple keeps adding extremely significant business areas (cyclinders if you like) and is becoming more diversified this way. They are doing what they do best and are managing the business area growth cyles very well with more yet to come. Their brand has never been stronger and they have so far yet to climb for market share in most of these areas (computer, cell phone, gaming, entertainment, home market, etc,). Only IPOD business is somewhat saturated (similarity to GOOG business) but still is well managed and transitioning plus have more International growth. Who has better distribution also at the Retail level and who has the greatest "Halo" around them for incremental and related sales. We're not seeing any real significant stumbling here and with such diversification of market businesses, Apple could weather a stumble better than most and we're seeing how well they perform in this rough economic climate--They stand out at the top in the Tech Sector. So, why isn't Apple $700, $500 or even $300 per share like Google ? Isn't $170+ a steal ? I don't doubt we'll see $300 per share before too long (12 to 18 months). Apple pound for pound is your best investment. Google is still too high priced IMO.

2008 Aug 14 02:10 PM

[fatcat:]

I am thinking about buying a Mac Mini for my home.I'm an old guy,but pretty tech savy. I have windows Vista laptop for travel.Am I making a good move? I already have a good flat monitor and wireless setup and I've been using Safari for windows(which is great)...any thoughts?

sorry to change the subject,but I know you young guys will steer me right..

2008 Aug 14 02:42 PM

[Cliff T:]

Dear Mr. Cat:

Wait about 30 days. In mid-September is is expected that Apple will reenergize its laptop lines (consumer and "professional"). A laptop from either line will eliminate your need for two computers.

Apparently, you already have a monitor. You can use your laptop as your CPU when you are at home. And, then disconnect it from the monitor and take it traveling with you.

Currently, the MacBook line (consumer) of laptops can power a 24-inch monitor, while the MacBook Pro line can power a 30-inch monitor.

Either can work with a wireless (or wired) mouse and keyboard. Both lines are powerful enough to replace your MacMini.

CT

2008 Aug 14 03:00 PM

[Shorting Sh...:]

Mac mini is a good box. Both my son and a couple of friends have had theirs for a couple of years and they are pleased.

2008 Aug 14 03:13 PM

[fatcat:]

Thanks,guys!

2008 Aug 14 03:54 PM

[MichaelinWa:]

I own Google stock. I also own an iMac, iPod, download from iTunes, and think Apple has a fantastic future with products that integrate well with eachother. If Apple stock just would take a signifcant dip I'd be all over it. I might buy some even if it doesn't.

In my mind (hopefully in the real world too) Apple's future is pretty darn certain. Though it scares me that Jobs is so much associated with the company's success. Anyway, I think the greater certaintly of Apple is reflected in the higher valuation (by some measures) relative to Google.

I see Google as much more in uncharted waters. I went into the stock knowing that. In return, valuation is a bit better (again by some measures).

One thing for certain, a lot of companies are gunning for both Apple and Google just because they are so successful. Maybe a good question is, "Which can maintain their competitive edge longer", because that is probably the better stock to own.

2008 Aug 14 05:33 PM

[Tyler Harri...:]

Apple is the better buy. The number of people converting to Apple computers from windows is continuously rising. Google, on the other hand, is already dominating the search-engine advertisement industry and has little room for growth.

Either way both stocks are solid. But if you're looking for growth, I choose Apple.

2008 Aug 14 08:21 PM

[David Hume:]

My 2 cents: I love both AAPL and GOOG but both stocks should be handled with care. Both companies could see their earnings rise significantly over the next five years but if growth starts to decelerate multiples will compress and the stocks will go nowhere. Compare Apple and Google's valuation with Microsoft's. Also, Apple's anemic R&D spending is troubling (but it certainly hasn't done Microsoft any good!)

MC FCF MC/FCF R&D
MSFT 254,826 18,430 13.8 8,164
AAPL 158,075 6,104 25.9 1,018
GOOG 157,233 4,101 62.1 2,534

(data from Morningstar)

2008 Aug 14 09:59 PM