Apple (AAPL) and Alphabet (GOOG) are two members of the exclusive FAANG club. The two companies have a market capitalization of more than $806 billion and $763 billion respectively and are some of the most followed companies in Wall Street. YTD, the stock prices of the two companies have gained by 8% and 6% respectively. A while back, after I published this article on Apple, a reader sent me a message asking me to compare which company, between Apple and Alphabet was a better investment. In this article, I will compare the two companies and conclude with the one I would recommend as a long-term investment.
For this part, I will compare how the two makes money. In the last twelve months, Apple has generated revenues of more than $261 billion. Most of this revenue comes from the iPhone, which accounts for more than 62% of the total sales. With the iPhone revenue starting to slow down, the company has pivoted to the services sector which generated more than $10.2 billion in the fourth quarter. Its other revenues come from computing products like iPad and Mac. Geographically, the United States is the biggest source of income followed by Europe and China.
Apple is beloved by investors because of the high margins it generates from sales. In the last earnings, the company had gross margins of 38% but EBITDA and net profit margins of 33% and 23% respectively. These margins are higher than those of other hardware companies. However, as the company shifts focus to the services segment, these margins could start to slow.
In the same period, Alphabet generated more than $145 billion in revenues. Most of these revenues came from the Google segment, which includes all the advertising products. As companies shift their advertisement budgets from the traditional media to digital, Alphabet has emerged as a winner because of the role search, YouTube, and Android play in the market. Alphabet has gross margins of 54%, and EBITDA and net profit margins of 32% and 22% respectively. The reason for the relatively lower profit margin is that GOOG is increasing its spending in a bid of accelerating growth. I believe that in the long-term, Alphabet’s margins will rise as the current investments starts to mature.
Apple has a great balance sheet with more than $373 billion in total assets. Of these, the current assets are $140 billion. Cash and short-term investments are more than $86 billion. In the liabilities side, the company has total liabilities of more than $258 billion. From this, it has a combined short and long-term debt of more than $110 billion. The shareholder equity comes at more than $117 billion. The strong balance sheet has enabled Apple to return money to investors through share buybacks and dividends. In the past five years, the company has issued dividends worth almost $70 billion and bought back stock worth more than $280 billion.
Alphabet on the other hand has total assets of more than $273 billion. It has cash and short-term investments worth more than $109 billion and combined current assets of more than $135 billion. Its total liabilities are $55 billion. It has no short-term debt but it owes more than $3.9 billion in long-term debt. The shareholders equity is more than $177 billion. Even with this balance sheet, Google does not issue dividends but it has spent more than $30 billion in share repurchases in the past five years. There is a likelihood that the company will start returning money to investors through dividends in the next few years.
With Apple’s core segment slowing down, the company is banking on the services segment. This segment includes products like Apple Pay, Apple Music, Apple Appstore, and Apple Carplay. Already, this segment has started to generate excellent growth for the company with quarterly revenues of more than $10 billion.
It is also planning to launch a video streaming service to compete with Netflix (NFLX). While the streaming industry is facing high competition, Apple could become a big player in the industry because of its large installed base. It has also started to create partnerships with other TV companies like Samsung and LG. However, this will not be an easy industry for the company because it will be chasing other companies like Netflix, Disney (DIS), and Amazon, which have a big library of original programming.
On the future, Alphabet has a number of advantages over Apple. First, Apple is already established in China, where it derives revenues of more than $50 billion. The problem is that Apple’s smartphone competitors from China like Huawei and OnePlus are gaining market share, which has led to a slow down in Apple’s growth. Alphabet on the other hand has more room to grow in China through its android product. The near monopoly of Android in China will remain because Android is free to use by the manufacturers. As the economy grows, Alphabet could generate more income from the app store in China. The company is also considering relaunching of the search product in China.
Second, Alphabet has invested billions of dollars on the Waymo product. In Alphabet’s reporting, Waymo belongs to the Other Bets segment, which makes a tiny amount of Alphabet’s total revenues. This could change once Waymo starts generating income. In fact, analysts value Waymo alone at more than $100 billion. In a recent note, analysts at UBS say that Waymo will generate more than $114 billion in 2030.
Third, Alphabet will continue being the market leader in online marketing. This industry is expected to have a CAGR of 21% up to 2026. Of all the top companies in this space – Amazon, Twitter (TWTR), and Snap (SNAP) – GOOG is the best positioned. This is because GOOG owns search and has no meaningful competitor. It owns Android, where it has no major competitor and it also owns YouTube, another platform with no meaningful competitor. With this ecosystem, GOOG will continue being the biggest advertiser in the world.
Fourth, GOOG has invested billions through the Google Ventures platform. Notable companies that it has invested in are Uber (UBER), Slack, and Stripe among others. It had also invested in the now-public companies like DocuSign (DOCU) and Hubspot (HUBS). Other companies that have been acquired are Jet, Collaborate, and Flatiron Medicine. With Uber and Slack going public this year, the company could see huge return on investments. Apple on the other hand does not have a venture capital arm unlike other technology companies like Microsoft, Salesforce (CRM) and IBM (IBM). Instead, Apple focuses on private investments such as Didi and Finiser. It has also invested a portion of funds to the Vision Fund. Therefore, from the ventures standpoint, I believe that Alphabet is better positioned for growth than Apple.
In addition, GOOG is a more diversified company unlike Apple. In this, the company has spent years building products both for the consumers and for enterprise customers. For the enterprise, GOOG’s relatively newer products like the cloud are starting to bear fruits. According to Citi (C), GOOG, which is the fifth biggest cloud company in the world could see its cloud revenues reach more than $17 billion in 2020. GOOG has also increased its focus on consumer products, with its Google Pixel devices receiving good reviews. Its other devices like Google Home Hub too receiving good reviews. It has also ventured into AI, cognitive science, and medical research. While these products will continue forming a small part of the overall GOOG revenue, I view the diversification as a plus to the company. Apple on the other hand has been a successful consumer-facing company. This is not entirely a bad thing because Apple has been really good at consumer products. However, I believe that GOOG’s diversification across all its products provides it with an edge over Apple.
The two companies are facing a number of challenges. Apple is facing the challenge of slowing iPhone sales and this week, it was revealed that a number of its apps are recording user screen without their permission. This is risky for Apple, a company that has long associated itself as a champion of privacy. Apple also faces the challenge of coming up with a hit high-margin hardware product like the iPhone. Its recent attempts to get into the smart speaker industry has not been very successful.
Alphabet on the other hand faces the challenge of regulations. In recent years, the company has received hefty fines from the European Union and more similar fines are expected. The company will also be the biggest casualty on the proposed Article 13 rules by the union. It is also facing scrutiny from lawmakers from a number of countries on the spread of fake news through its platforms. The two companies face the challenge of companies like Netflix and Epic Games – owners of Fortnite – moving away from the respective app stores.
Verdict: Alphabet Wins
To be clear, GOOG and Apple are great companies that have changed the world for the better. The two companies also face a number of challenges on privacy issues and regulations. However, as an investment, I believe that GOOG is a better company to own than Apple. First, the company has more than $109 billion in cash and very little debt. This means that GOOG will probably start returning cash to investors in form of dividends within a few years. Second, GOOG continues to have the biggest market share in online ads and there is no close competitor. This is unlike Apple, whose core product is facing a major threat from other phone manufacturers like Huawei, Samsung, and OnePlus. Third, as mentioned above, GOOG is a more diversified company than Apple generating income from both enterprise clients and individuals. Fourth, GOOG has invested billions into research areas focused on cognitive solutions, healthcare and biosciences, and life sciences among other areas. These investments could help GOOG become the largest player in these industries.
Disclosure: I am/we are long GOOG, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.