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Better Buy: Apple vs. Alphabet

By Will Healy - Feb 6, 2021 at 8:00AM

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Which tech giant offers more potential for gains?

Apple (AAPL 2.45%) and Alphabet (GOOGL 5.11%) (GOOG 5.20%) have each innovated their way to the top of the tech industry. This success has brought huge returns to their long-term investors. While both companies should continue to grow, determining which of these tech stocks might make the best investment comes down to one intangible factor: how well Apple and Google can capitalize on their innovations.   

What draws customers to each company

Although Apple abandoned the "think different" slogan years ago, that mindset has long defined the company and its innovations, leading to successful products such as the iPhone. Today, its smartphones and other products appear poised to drive further growth.

User typing on a laptop in search of information.

Image source: Getty Images

Still, nobody can deny Alphabet's own innovative prowess. Its dominance of search and video sharing spawned a lucrative internet ad industry that drives most of the company's revenue today. 

Though they've pursued differing paths, both companies have become competitors in some areas, especially mobile device operating systems. Apple's iOS and Alphabet's Android dominate this part of the industry. According to Statcounter, Android controls about 72% of the market, while iOS claims just over 27%.

Innovation leadership

Despite Android and its other ventures, Alphabet still relies heavily on ads. Now, the company faces increasing ad competition from Facebook and Amazon. It retains about 29% of the US digital ad market, down from 32% last year, according to eMarketer. While this is a good reason for Alphabet to innovate and branch out from Google, the search engine and related operations including YouTube still make up more than 99% of the company's revenue. Additionally, Google Cloud revenue is the only Google business broken out separately from the ad-related parts of Google, giving investors little visibility over which specific segments drive revenue growth.

Moreover, the potential value not reflected in Alphabet's financials should concern investors. The Financial Times estimated the value of Waymo, Alphabet's self-driving car unit, at $30 billion -- just under 13% of Alphabet's $201.4 billion book value. That estimate doesn't even address Sidewalk Labs, Verily Life Sciences, Calico, Fiber, or Alphabet's numerous other businesses.

Yet according to the company, all non-Google businesses generate less than 1% of company revenue. Admittedly, the company may include revenue from some of the aforementioned divisions under Google's umbrella. However, even under the best-case scenario, the average investor has no visibility on whether or how much these enterprises contribute to revenue and earnings.

Apple has also innovated in recent years, particularly with a 5G iPhone, Apple Silicon processors, its thriving subscription-based services business, and the health-monitoring features of the Apple Watch. However, Apple reveals more explicitly than Alphabet how it monetizes innovation, breaking out its revenue from each of the various businesses and product lines it pursues. Consequently, we know that all product categories such as the iPhone, iPad, services, and wearables currently grow revenue at double-digit rates.

Financial results

Giving investors more insights into the value its different businesses create may explain why Apple far surpasses Alphabet in market cap. Its $2.3 trillion valuation comes in around 65% larger than Alphabet's $1.4 trillion. 

Admittedly, Alphabet has registered faster growth recently, mostly due to Google Cloud's 46% revenue growth over the last 12 months. Alphabet reported more than $182.5 billion in net sales, up roughy 13% over the previous 12-month period. This compares with Apple's $294.1 billion in sales -- far larger overall than Alphabet's, but only a 10% increase over the same period. Also, Alphabet registered 17% net income growth versus 11% for Apple.

Nonetheless, Alphabet reported higher income growth in large part by cutting its sales and marketing expenses and slowing the growth of research and development costs. In contrast, Apple's operating expenses have generally increased with rising revenue, with research and development rising by over 16%. Alphabet can't reduce these costs forever and expect to remain competitive. Hence, this is probably not as much an advantage for Alphabet as it might appear.

Additionally, the size of each company's cash hoard points to Apple's better long-term performance. Although Apple tapped the debt market recently, it could get by without borrowing. Apple holds nearly $196 billion in cash and equivalents. Though Alphabet's nearly $137 billion in cash and equivalents places it in a similarly stable position, it still lags Apple in this area.

Investors have come to appreciate this advantage. Apple sells for 37 times earnings compared with Alphabet's P/E ratio of about 35. Nonetheless, Alphabet was historically the pricier stock. As recently as two years ago, Apple's P/E ratio stood at about 13 while Alphabet's stood in the 25 range.

Rising demand for tech products amid the pandemic as well as Apple's new technology such as the 5G iPhone, the Apple Watch, and the Apple silicon chip likely helped to boost demand for Apple's stock. This multiple expansion has helped Apple stock nearly double Alphabet shares' returns over the last 12 months.

AAPL Chart

AAPL data by YCharts

Why I choose Apple

Both companies foster innovation and hold enough cash to control their destinies. However, while Alphabet invests heavily in new technology, it either has not monetized its inventions well or, at the very least, declined to communicate these results to investors.

Conversely, Apple has capitalized on the iPhone, Apple Watch, and other inventions and has reported such results more explicitly. Such transparency makes Apple an easier choice. Until Alphabet can figure out how to unlock and reveal more of its potential value, I believe investors should continue biting into Apple.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$141.66 (2.45%) $3.39
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,359.50 (5.11%) $114.66
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$170.16 (7.19%) $11.41
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$116.46 (3.58%) $4.02
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,370.76 (5.20%) $117.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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