Apple (AAPL 0.92%) and Facebook (FB 2.48%) generally aren't considered competitors, since the former mainly sells hardware, software, and services and the latter generates nearly all its revenue from ads.
However, the relationship between the two tech giants has grown increasingly hostile in recent years. After repeatedly criticizing Facebook's targeted advertising practices, Apple revealed an upcoming update for iOS 14 that will allow users to opt-out of data tracking across all iOS apps.
Facebook bought full-page newspaper ads to protest Apple's move, and claimed it could reduce ad revenue from its third-party Audience Network by over 50%. Apple still plans to release the update later this year.
Investors have been more bullish on Apple than Facebook. Apple's stock surged nearly 80% over the past 12 months as investors expected the iPhone 12, its first 5G device, to boost its sales. Facebook's stock rose just 25% as slower ad sales during the pandemic, antitrust challenges, and ethical concerns kept the bulls at bay.
But past performance never guarantees future gains, so let's take a fresh look at both companies' latest earnings reports to see which is the better overall investment for 2021.
Apple gets off to a solid start
Apple's revenue and earnings rose 6% and 10%, respectively, in fiscal 2020. Rising sales of Macs, iPads, Apple Watches, AirPods, and software services offset a 3% decline in iPhone sales -- which still accounted for half of its top line.
But in the first quarter of 2021, which ended on Dec. 26, Apple's revenue jumped 21% year-over-year as it rolled out the iPhone 12. Its iPhone sales rose 17%, accounting for 59% of its top line, and complemented the double-digit growth of all its other segments. Its total services revenue, which accounted for 14% of its top line, grew 24% as it surpassed 600 million paid subscribers across all of its services.
Apple's revenue also hit all-time highs across all of its geographic regions. Its sales in Greater China surged 57%, outpacing all other markets and accounting for 19% of its top line. Its gross margin expanded to its highest level since 2016 as its earnings, buoyed by $24.8 billion in buybacks, grew 35%.
Apple didn't provide exact guidance for the rest of 2021, but CFO Luca Maestri predicted its revenue growth "will accelerate on a year-over-year basis" throughout the year -- even as the services segment faces tougher comparisons to the pandemic-related tailwinds in 2020.
Analysts expect Apple's revenue and earnings to rise 16% and 23%, respectively, for the full year. But those estimates could be too low, since they're likely based on the iPhone forecasts that Apple just easily beat.
Facebook faces a murkier future
Facebook's revenue and earnings rose 22% and 57%, respectively, in fiscal 2020, which aligns with the calendar year. Its growth in ad revenue, which accounted for 98% of its top line, accelerated in the fourth quarter as some of the pandemic-related headwinds weakened.
Its core platform hosted 2.8 billion monthly active users (MAUs) at the end of 2020, up 12% from 2019. An average of 2.6 billion people used its entire family of apps -- including Facebook, Messenger, Instagram, and WhatsApp -- every month, up 15% from a year earlier.
Facebook's average revenue per user (ARPU) rose 19% year-over-year to $10.14 in the fourth quarter, with growth across all its geographic regions. Its average revenue per person (ARPP) across its entire family of apps also grew 17% to $8.62. Facebook's operating margin also expanded for the full year, as a lower tax rate offset its infrastructure investments and sales of lower-margin Oculus headsets.
However, Facebook provided ominous warnings instead of clear guidance throughout its conference call. CEO Mark Zuckerberg claimed Apple's privacy claims were "misleading", and that Apple was attacking its apps to turn iMessage into one of Facebook's "biggest competitors". CFO David Wehner also warned that Facebook would face "significant ad targeting headwinds," including Apple's iOS 14 update and new regulations, in 2021.
Analysts expect Facebook's revenue to rise 22% this year, but for its earnings to grow just 5% as it ramps up its investments and pays higher taxes. However, those estimates might not fully reflect the unpredictable impact of Apple's iOS 14 update and its looming antitrust challenges in the U.S. and Europe.
The winner: Apple
Apple's stock trades at 33 times forward earnings, which is higher than Facebook's forward P/E ratio of 21. But Apple deserves a slight premium because several catalysts -- including robust iPhone sales, new Macs, and its ever-expanding services ecosystem -- could help it crush analysts' estimates this year.
Facebook arguably deserves to trade at a discount because its core business is being targeted by Apple and government regulators, and it remains vulnerable to disruptive social networking challengers like Pinterest and Snap. Moreover, the Capitol riot highlights Facebook's inability to control its users and the instability of its core business. Based on these facts, I believe Apple will easily outperform Facebook this year.