Apple (NASDAQ:AAPL) and Google parent Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) are favorites in the quest to become the first $1 trillion company by market cap. But the race itself is irrelevant. One way or another, Apple and Alphabet will command 13-figure market capitalizations sooner or later.
Hitting $1 trillion first will come with little more than bragging rights, as we're really just talking about two tech giants appreciating by roughly 5% to 10%. Apple may hit the mile marker as soon as this week if it comes through with a blowout quarter after Tuesday's market close. Investors should concern themselves with bigger gains, so it's more important to ask which stock has the better chance to produce greater returns over the long haul. With that in mind, let's go over the growth prospects for both tech darlings, following that with some perspective on valuation and income.
If top-line bursts were all that mattered, Alphabet would take this battle in stride. Apple's revenue has historically taken big steps when the company introduces bar-raising iPhone models, but for the most part it doesn't do much outside of those spikes. Apple has come through with double-digit percentage revenue growth just once in the last five fiscal years, and its three-year annualized growth rate clocks in at a modest 5.2%.
Alphabet, on the other hand, checks in with a three-year annualized growth rate of 21.2%, and it's five for five, having grown its top line in the double digits over the past five years. Both companies are riding high lately: Revenue growth at Google is accelerating for the third year in a row, while Apple is working on its second year of accelerating revenue growth. Apple is coming off of three straight quarters of double-digit percentage growth, with analysts expecting that streak to stretch to four quarters with Tuesday afternoon's report.
Looking ahead, analysts see Apple falling back to near its historical levels -- modeling just 4.5% growth in fiscal 2019. Alphabet will likely join Apple in decelerating revenue growth next year, but Wall Street pros are targeting a 19.4% spurt. In short, Alphabet takes the revenue growth category.
The comparisons get kinder for Apple when we start applying common valuation metrics. Alphabet trades at a rich 31 times this year's projected profit and 26 times next year's target. The fight on this front is not even close, with Apple fetching 17 times this year's earnings and just 14 times next year's analyst estimate.
In terms of revenue multiples, Apple runs away with this race. Apple's enterprise value is 3.9 times its trailing revenue. Alphabet has a loftier multiple of 6.2. A few years ago, the argument could be made that Alphabet warrants a higher multiple since Apple's hardware emphasis makes it a lower-margin business, but that hasn't been the case lately. Gross margin at both companies is shrinking for the third fiscal year in a row, but Apple's net profit has held up well. Alphabet clocks in with a lower net margin as it invests in less profitable growth at YouTube, Waymo, and other businesses.
Income investors also don't have a choice here. Apple pays a modest 1.5% yield at current prices, but that's 150 basis points more than Alphabet. Google's parent company doesn't pay out dividends, and it's not likely to start anytime soon. The advantage here goes to Apple.
Let's break a tie
The fashionable answer here would be Apple. It's the one stock that could make big headlines this week if it cracks $1 trillion in market cap later this week. Out of the two stocks, it's the one I own personally. Nevertheless, I'm going to give Alphabet the "better buy" victory here.
Alphabet's a beast. The sky-high earnings multiple is the result of suppressed earnings that will be easier to gain back than it will be for Apple to expand on its profitability. Both companies have their risks. Apple has too much riding on the iPhone, and we've seen performance lulls between major updates. Alphabet's growth has been far more consistent, but it, too, is vulnerable to a search or social platform making it less inviting for folks to belly up to the Google address bar.
I think both stocks will be winners, continuing to beat the market. However, if I had to choose the stock that would be higher a year from now, I'd have to go against where my own money is and side with Alphabet.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rick Munarriz owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.