Better Buy: Alphabet vs. Apple

Alphabet (GOOG 0.74%) (GOOGL 0.55%) and Apple (AAPL 1.27%) have both built tech empires on a global scale. Alphabet's Google essentially serves as a gateway to the internet, and Apple's hardware products are among the most coveted consumer electronics in the world.

Over the last three years, the share prices of Alphabet are up 115% while Apple stock has popped 225%, both easily outperforming the broader market over the same timeframe. So which one of these tech stocks is the better buy today?

What we know about Alphabet

Alphabet's business can be broken into two segments: Google and Other Bets. The former's primary focuses are on advertising and cloud computing, while the latter is a collection of currently unprofitable endeavors that may turn into larger businesses at some point -- think of it as an incubation chamber.

Image source: Getty Images

The Google business generates revenue primarily through advertising. This includes Google Search and other company-owned properties (like Google Play store), YouTube, and millions of third-party publishers that use Google's ad tech platforms.

Last year, despite pandemic-driven increases in digital activity, Google turned in an underwhelming performance. Advertising revenue grew just 9%, and the company's market share on digital ad sales in the United States fell to 28.9%, down from 31.6% in 2019, according to eMarketer. Meanwhile, competitors like Amazon and Facebook gained market share.

In cloud computing, Google Cloud sits in third place with 7% global market share, trailing leaders like Amazon Web Services and Microsoft Azure by a wide margin. On the bright side, Google Cloud is growing revenue more quickly than either of these competitors.

Finally, Other Bets includes revenue from Waymo, Alphabet's autonomous driving company. While this segment currently operates at a loss, Waymo One started offering fully driverless rides in the Phoenix metropolitan area last October, and analysts at investment bank UBS believe Waymo could pull in as much as $114 billion per year by 2030. That would be a game-changer for this company.

In the last few years, Alphabet's financial performance has been solid for an enterprise of its size.

Data source: Alphabet  SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rate.

In terms of returning cash to shareholders, Alphabet does not pay a dividend, but it did spend $31.1 billion and $18.4 billion on share repurchases in 2020 and 2019, respectively.

As a final caveat, Alphabet faces regulatory scrutiny on several fronts, including a lawsuit filed by the U.S. Department of Justice. Additionally, the company's app store fees have recently fueled controversy with Epic Games, leading Alphabet (and Apple) to slash some app store fees.

At this point, it's too early to tell how these legal troubles will impact Alphabet's business, or if there will be any impact at all. But investors should keep this situation on their radar.

What we know about Apple

Apple ranks No. 1 on Fortune's list of the world's most admired companies, and it also takes the top spot on Forbes' list of the world's most valuable brands. That gets to the core of the company's competitive advantage: Consumers love it.

Apple's business can be broken into two segments: products and services. While hardware products have traditionally been its growth engine, Apple has increasingly emphasized its services business. This includes subscription services like Apple Music, Apple Arcade, Apple News+, and Apple TV+, as well as payment services like Apple Card and Apple Pay.

This move makes sense. Hardware sales tend to be cyclical, leading to lumpy financial results, whereas subscription products and services tend to bring a steady inflow of cash. Furthermore, with over 1.65 billion active Apple devices worldwide, this is another way for the company to monetize its massive user base.

Apple's financial performance has been somewhat mediocre in recent years, due in large part to weak iPhone sales in both 2019 and 2020. Investors shouldn't worry, though -- that trend has reversed in a big way with the launch of the iPhone 12.

Data source: Apple SEC filings. TTM = trailing-12-months. Note: Q2 2021 ended March 27, 2021. CAGR = compound annual growth rate.

Unlike Alphabet, Apple pays a dividend of $0.22 per share. The payout ratio currently sits at 22%, a small figure as dividend payout ratios go. Add in $70 billion in cash, equivalents, and marketable securities on its balance sheet, and that dividend is about as safe as it could be. Apple also repurchased $72.5 billion and $67.1 billion of outstanding stock in 2020 and 2019, respectively.

Going forward, despite its focus on services, Apple appears to have a few new products in the works. For instance, based on patent filings over the last decade, Apple is developing augmented and virtually reality headsets, the first of which could be released as early as 2022. Apple is also working on a self-driving electric vehicle, though this is reportedly five years away from launch.

The verdict

Both of these tech companies have built strong brands and achieved incredible scale, with operations that span the globe. What's more, both Alphabet and Apple recently announced strong quarterly earnings, and both have growth opportunities on the horizon. For those reasons, I think either stock could be a market-beating investment.

But this is a contest -- and Apple wins by a thin margin. Google is losing market share in its core advertising business, and the company is caught in a growing web of antitrust concerns. Additionally, I think Apple's brand name matters more to consumers, which should make any upcoming product launches like augmented reality glasses or an Apple Car a spectacular success.