Let's start with the obvious: Google makes more money than Apple does. It had earnings of $10 billion over the past 12 months, compared to $8 billion for Apple. And while both companies' earnings are growing fast, Google's are growing faster.
But here's the clincher: Google's earnings were on less than $20 billion of revenue -- that's what I call a profit margin. Apple, by contrast, needed more than $30 billion of revenue to get its $8 billion of gross profit.
Of course, when it comes to stock valuations, the present doesn't matter nearly as much as the future. So what does the future hold for these two franchises?
They're both strong technology giants with very large "moats". But Google is stronger, and its moat is bigger. It owns search, certainly in Europe and the Americas, and it's making strong inroads into display advertising as well. Sam Gustin might be kvetching about "the toll being inflicted on Web advertising by the slowing economy," but the growth rates are still pretty torrid for what is now a reasonably mature industry:
Karsten Weide, an analyst at IDC, told Bloomberg that online ad spending grew 18.9 percent in the second quarter, a growth rate 7 percentage points lower than a year ago. Were it not for the slumping economy, web ad spending would have grown by more than 20 percent, she said.
19% market growth? I think Apple would be very happy with that. And remember that Google is increasing, not decreasing, its share of total online ad spending. Over at Apple, by contrast, the iPod/iTunes duopoly can't help but see its market share eroded going forwards, as DRM-free online music stores start competing on price, the record labels try to cut Apple down to size, and the marginal utility from buying your fourth or fifth iPod starts to decline.
Apple's phone business looks great right now, but the industry is notoriously cutthroat, Apple doesn't have the degree of control it's used to elsewhere, and in any case handset margins are never going to be as big as margins on iPods or MacBooks. Yes, the iPhone app store is a very promising business model -- but it's going to be quite some time, if ever, before it makes a significant contribution to Apple's bottom line.
And then there's the computer business. Macs are selling well, at very high margins. But Google's muscling in on the computing business too: over the long term, it makes sense to do all your computing in an ever-improving cloud than it does on specific, individually-owned pieces of hardware which always, eventually, break. The more important the cloud, the less important the computer, and the less important the computer's operating system, too.
Howard Lindzon, by contrast, thinks the stock market is right, and that Apple should be worth more than Google. Two of his arguments are weak: that "social search" will make Google obsolete (I'll believe it when I see it), and that "MacBooks are getting cheaper" (no they're not: Apple's entry-level laptop has been priced between $1,000 and $1,100 for years, and it's going to stay there).
Howard's best argument is that a falling Google share price could become self-fulfilling: "if the stock lingers between $500 or worse yet, drifts lower, you will see a brain drain of epic proportions," he says. Google's competitive advantage has long been that it was smarter and richer and one or two steps ahead of the competition. As it matures, it might not have the same ability to attract the very best and the brightest.
But if Google has job risks, Apple has Jobs risk -- which is much bigger and probably just as imminent. No one at Google is even as important to the company as Jonathan Ive is to Apple, let alone Steve Jobs. If I'm holding a stock as a long-term investment (which is the only sensible way to hold a stock) then I don't want to run the risk that the company will founder the minute the CEO exits.
And talking of the long term, the option value of all those crazy Google projects which never make any money is huge. There's a good chance that, eventually, one of them will take off in a big way, and if it's energy-related, it could make Google's present business look positively puny.
Google stock is volatile, just as the founders said it would be in their prospectus. But if I was going to sleep today to wake up in ten years' time, I'd be much happier with Google stock under my mattress than Apple.
Now lets look at the Iphone vs the Blackberry. Sure some people will buy one or the other, but the fact is, they are also driving each other's sales. The hype surrounding both platforms is bringing more and more people into the smartphone market.
Google simply doesn't have as many exciting new revenue streams. Android and some of Google's other projects are totally unknown. Who knows what will happen with Android? Apple has 3 hugely successful businesses, each one driving the others, and I have a feeling that Apple will end up with another big seller, this time something in the living room.
1- Of course Google has higher gross/net margins - it has no hardware products. This is one reason why Apple has higher margins than Dell & HP - because Apple has larger software component. So this is not an issue.
2- Actually, if you look at the Yahoo key statistics page for each, there are several similar numbers. ROE, ROA, Quarterly earnings growth(yoy) & the trailing PE, & Enterprise Value/EBITDA (ttm)
3- The forward PE, and the PEG ratio favor Google. This, however, is precisely where the issue lies. The forward looking estimates are exactly what many people are beginning to question. The reflect estimates that are old and are likely conservative for two reasons.
a- They do not really reflect an expected 40+% increase in Mac sales. this has occurred now for several quarters, and some people do not see why it should not continue.
b- The figures mostly do not reflect the absolutely extraordinary success of the iPhone 3G launch. The iphone sales are a real phenomenon as is the success of the App Store.
c- Finally, also ignored is the fact that, given the delayed accounting for iPhone sales, that real earnings are not reflected in a current quarter's EPS. Therefore a portion of EPS is hidden. Therefore the *real* PE ratio is NOT what is listed.
IMHO
Google is starting to show signs of monopolistic behavior, a bit like Microsoft did at the turn of the century. A good example is their rather unattractive response to the Microsoft/Yahoo acquisition talks; running to the regulators for help. When that kind of behavior starts creeping in, it´s a strong indicator that the company is about to peak. And as far as I can tell, the search ads is their only revenue stream of any significance.
Apple´s iPod/iTunes business is close to being a monopoly and the market is starting to show sign of saturation, but Apple are cannibalizing it themselves with the iPhone and thereby entering the cell phone market where they will achieve ca 1% market share this year. There´s another humongous growth opportunity for you.
So yes, Google has a more profitable cash cow than Apple does, but Apple has the greatest growth opportunities for 2 of their 3 (exisiting) revenue streams.
With a market share of 70%, where do you go? The only way for Google to grow, is to grow the size of the market. They believe handhelds will provide them some of that growth, but they don´t think the handheld manufacturers (bar Apple) provide a good enough online experience to drive web search (which in turn drives Google´s revenue). Hence Android.
It´s a bit of a paradox really; Android will be a competitor to the iPhone, but the iPhone is no competitor to Google. On the contrary, it´s a revenue earner for them.
HTC once said that they have problem on hardware to Android, why Google need Android, does it means Google need new smartphone OS to create extra earning? Otherwise year 2009 stock price will fall back below what it is now.
This will happen even if the Wall St types, MS & RIM fanboys keep spreading FUD about the iPhone and other Apple products. This week's FUD is about the 3G reception- what a load of crap and stupid journalism by the likes of ABCNews, Wall St Journal, USA Today and TheStreet.COM. Talk about lame reporting.
Do people remember Alta Vista? Nope. Lycos? Nope. Excite? Nope. Yahoo? Still a little bit. Google? Yep! but it's just the search engine of the day, another one will come out of the woodwork and replace it by 2015, it's how this business works.