Move Over Apple Inc., Google Inc. Is Ready for Number One

It was about two and a half years ago when Apple (NASDAQ: AAPL  ) reached a major milestone in its return to glory: It surpassed oil giant Exxon to become the largest company in the world, as measured by market capitalization. Apple's watershed moment was especially sweet for long-time iFanatics that had weathered a nearly 15-year storm before it completed the transformation from also-ran to world leader; thanks to the return of its savior, Steve Jobs.

In Aug. 2011 when Apple and its $337 billion market cap supplanted Exxon as king of the hill, Google (NASDAQ: GOOGL  ) was valued at a paltry $177 billion. At the time, the notion that Google had a chance to pass Apple as the world's most valuable company in the foreseeable future would have seemed outlandish. But if recent trends continue, and there are reasons to believe they will, we'll have a new value-leader before this year's out.

The tables have turned
Last year at this time, Google's market cap stood at about $248 billion, compared to Apple's $430 billion. As iFans know, even with a substantial market cap lead over Google at this time last year, Apple's $430 billion market cap was significantly lower than it was even a few months before that, when it topped out at $656 billion in Sept. of 2012.

Now, fast-forward to today. Google's market cap of $375 billion still trails Apple's $456 billion, but is quickly making up ground. Google's nearly 50% jump in share price the past 12 months, coupled with Apple's 9% decline in the same period, are the reasons for the dramatic change in valuations. The questions are, why the about-face, and will it continue?

Behind Apple's numbers
One thing was clear even before Apple's recent earnings release: Its investors operate under a different set of rules and expectations than most. Despite setting all-time records for iPhone sales in a quarter – Apple moved 51 million smartphones in its fiscal 2014 Q1 – and establishing a new high by selling 26 million iPads, Apple stock is getting battered.

The problem? Even after setting iPhone sales records, apparently Apple's results were below analyst expectations. Adding to the pressure on Apple's stock price was its rather tepid forecast for Q2. According to some industry pundits, Apple's recent deal with China Mobile should have pushed fiscal 2014 Q2 smartphone sales to even loftier heights, but it may not happen based on its forecast. And Apple's Q2 revenues are expected to only match the year-ago quarter, so questions are being raised.

Margin pressure is another concern often mentioned by Apple bears, particularly as the smartphone industry becomes even more hyper-competitive, and pricing becomes an issue. But it's Apple's perceived lack of innovation, historically an area of unrivaled strength, that's causing the most angst among naysayers. And it's here that Google really shines.

Where Apple struggles, Google excels
It's not Google's dominant smartphone OS market share or stellar financial performance that differentiates it from Apple, or why it's on pace to surpass its rival as the most valuable company on earth, it's innovation. While Apple rumors generally entail a new smartphone's size, color, or equally unimportant feature, Google's setting cities up with Fiber Internet connections.

And while Apple is supposedly preparing to release a phablet sometime this decade, Google is exploring artificial intelligence (AI), self-driving cars, and using white space to bring the Internet to under-served markets. As Google pushes the envelope, Apple is still putting all its eggs in the same, old basket.

Perception is becoming reality, and the perception is that Google is leading the world with innovative products and services, and that will translate to long-term growth. That's why Google is on track to becoming the most valuable company in the world before this year's out, and it doesn't appear Apple is doing anything to prevent it.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 28, 2014, at 2:17 PM, jdmeck wrote:

    I am so sick of Apple Google comparisons. They are two companies in two different areas of business with a very small overlap. If Google ends up being worth more, who cares. In the long run it means nothing.

  • Report this Comment On January 28, 2014, at 2:52 PM, emilykulish wrote:

    There is a bubble with Google, and it is getting bigger and bigger. It does not matter whether Google can surpass Apple or not, the reality is it will follow the same route, and go back to where it was.

    Google is extremely good at creating hype. It wants to enter other markets with Google Glass and self-driving cars, but none of them will be successful in business. It is still 90% search engine company. The market is saturated now and the growth potential is very limited.

  • Report this Comment On January 29, 2014, at 11:47 AM, icposse2k wrote:

    Here are a couple of ways to think about the AAPL/GOOG comparison:

    1. Apple's profit is essentially the same as Google's revenue.

    2. Apple is returning $100B (approximately 25% of Google's entire market cap) to shareholders through dividends and buybacks and is still growing its cash hoard.

    Google is an exciting company, but they aren't in the same league as Apple in terms of profit and revenue. Their search business accounts for virtually all of their profit, I have yet to see them make a financially successful foray into a new field. Just my $0.02.

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