A decade ago,
was a struggling computer maker on the cusp of reinventing
itself, thanks to the imminent launch of iPods, iTunes, and many
other hardware and services that would help propel the company to
an eventual $585 billion market value.
was also on the cusp of strong growth, thanks to its impressive
search engine. Google's current $400 billion market value is a
testament to that company's greatness.
A decade on, Apple and Google have taken aim squarely at each
other. Each now offers a mobile phone platform, both companies
are using their operating systems and hardware ecosystems to
obliterate the traditional PC industry, each firm is gaining
strong traction with their entertainment portals (iTunes and
Google Play), and each intends to play a key role in the next
generation of car stereos.
As these business models converge, it becomes easier to
compare these two firms on an apples-to-apples basis. Notably,
Apple has become the value play, while in some respects, Google
has become the superior growth model.
As an example, Apple is settling into a phase of respectable
growth while Google is still in the midst of rapid growth.
Google's pursuit of acquisitions
explains some of that difference, but Google still appears poised
for greater organic growth, for at least the next few years.
Don't focus too closely on the difference in sizes of the
revenue bases. Apple derives a high percentage of sales from
hardware, which is inherently less valued. Notably, both of these
companies are now counting on fast-growing international sales to
offset maturity in U.S. markets. Google, for example, saw
international sales rise 28% in the second quarter (from a year
ago), while U.S. sales rose just 12%.
Apple vs. Google: Sales Growth
Although Apple trades near an all-time high, it is far from
expensive. Shares sport a double-digit free cash flow yield
(which is the inverse of the free cash flow multiple), which is
typically found only on companies that no longer have avenues to
growth. Google isn't nearly as cheap, but it is still a solid
bargain (on a free cash flow basis) when compared to the newest
wave of technology growth stocks, such as
On the other hand, utilizing free cash flow as a metric for
Google is a bit unfair. The company is spending so much money on
current growth initiatives that it is intentionally sacrificing
billions in free cash flow now for an even future payoff. (
is arguably going too far in that direction, and shares are now
being penalized for that.) Apple, for its part, is deploying $11
billion toward capital spending in fiscal 2014, up from $8
billion in fiscal 2013.
Apple vs. Google: Valuation
Of course, nobody is looking to buy Apple right now because it
is a value play, nor are investors solely focusing on Google's
projected 20% sales growth in 2015 and 2016. Instead, for
long-term investors, the value proposition rests on market share
-- and in the case of these two firms, market domination.
Which company will rule the roost? There's no simple answer
just yet, simply because we don't yet have a clear read on where
these businesses will be a half-decade from now.
Google, for example, is likely to
aggressively target the broadband market
, which could portend many years of capital spending but a far
higher revenue base. If Apple ends up grabbing major market share
in the television/video ecosystem, then it will become vastly
larger -- and more profitable. And both of these firms believe
that an increasing number of household devices can ultimately be
managed by their software platforms, which could also lead to
another growth spurt.
In the near term, Google creates a bit of a conundrum: The
company doesn't march to the cadence of a product cycle, and
therefore lacks clear catalysts. Apple, for its part, has
launched few hot new products under CEO Tim Cook, but that's
about to change.
As analysts at JMP Securities note: "Big picture, we expect
Apple to demonstrate much better product innovation over the next
several quarters than we have seen over the past several years,
and we believe the combination of larger iPhones, Internet of
Things applications (including the iWatch and iWallet), and its
enterprise thrust can return Apple to a share gain and
double-digit growth." They have a $135 price target, which
implies nearly 40% upside.
A key tell that Apple is on the cusp of a major wave of new
product launches: In its 10Q, the company noted a 100% jump from
the March to June quarters (to $5.6 billion) for "other
obligations" for items such as marketing and quality control
testing, which has typically preceded new product
Yet for investors looking for the right time to take profits,
this product cycle may prove timely. "Selling the stock on
product announcements has been the right approach in recent
years," note analysts at UBS, who see shares rising to $115. To
be sure, Apple is under the gun to deliver hits. Analysts at
Pacific Crest Securities "believe a massively profitable new
product is necessary to drive meaningful upside to AAPL. As a
result, if new products do not materialize in a huge new profit
pool, we are not likely to maintain our 'outperform' rating long
into the iPhone 6 cycle."
Risks to Consider:
Even with continued strong growth, these stocks won't
necessarily rise higher. Recall that
delivered solid growth from 2000 through 2010, but its shares
barely appreciated in that time. That's because investors looked
down the road and saw an era of eventually slowing growth, so the
forward multiple steadily compressed for Microsoft, offsetting
further sales and profit gains.
Action to Take -->
Neither Apple or Google carries a huge amount of risk. They are
two great companies that are decimating any would-be rivals, and
key metrics such as free cash flow are likely to grind ever
higher. But these stocks have already seen their valuations rise
by hundreds of billions of dollars over the past five years, and
they will need to deliver flawless execution to push their market
value higher. If these stocks make another move up in coming
quarters, it may be wise to lock in gains and wait for a better
entry price down the road.