Apple (AAPL) and Alphabet (GOOG) are two members of the exclusive FAANG club. The two companies have a market capitalization of more than $ 806 billion and $ 763 billion, respectively, and are some of the most followed companies on Wall Street. So far this year, the prices of the shares of the two companies have risen by 8% and 6% respectively. Some time ago, after publishing this article in Apple, a reader sent me a message asking me to compare which company, between Apple and Alphabet, was a better investment. In this article, I will compare the two companies and conclude with what I would recommend as a long-term investment.
For this part, I will compare how the two make money. In the last twelve months, Apple has generated revenues of more than $ 261 billion. Most of this revenue comes from the iPhone, which accounts for more than 62% of total sales. With the iPhone's revenues starting to slow down, the company moved into the service sector that generated more than $ 10.2 billion in the fourth quarter. Their other income comes from computer products such as iPad and Mac. Geographically, the United States is the largest source of income, followed by Europe and China.
Apple is loved by investors because of the high margins it generates from sales. In the last gains, the company had gross margins of 38%, but EBITDA and net profit margins of 33% and 23% respectively. These margins are higher than those of other hardware companies. However, as the company changes its focus to the services segment, these margins could begin to decrease.
In the same period, Alphabet generated more than $ 145 billion in revenue. The majority of these revenues came from the Google segment, which includes all advertising products. As companies shift their advertising budgets from traditional to digital media, Alphabet has become a winner due to the search function, YouTube and Android in the market. Alphabet has gross margins of 54%, and EBITDA and net profit margins of 32% and 22% respectively. The reason for the relatively low profit margin is that what your spending is increasing in an attempt to accelerate growth. I believe that in the long term, Alphabet's margins will increase as current investments begin to mature.
Apple has an excellent balance with more than $ 373 billion in total assets. Of these, the current assets are $ 140 billion. Cash and short-term investments are more than $ 86 billion. On the liabilities side, the company has total liabilities of more than $ 258 billion. From this, it has a combined short and long-term debt of more than $ 110 billion. The stockholders' equity reaches more than $ 117 billion. The strong balance sheet has allowed Apple to return money to investors through share buybacks and dividends. In the last five years, the company has issued dividends worth almost $ 70 billion and bought shares worth more than $ 280 billion.
The alphabet, on the other hand, has total assets of more than $ 273 billion. It has cash and short-term investments of more than $ 109 billion and combined current assets of more than $ 135 billion. Its total liabilities are $ 55 billion. It has no short-term debt, but owes more than $ 3.9 billion in long-term debt. Net worth is more than $ 177 billion. Even with this balance sheet, Apple does not issue dividends, but it has spent more than $ 30 billion on repurchasing shares in the last five years. There is a possibility that the company will begin to return money to investors through dividends in the coming years.
With the slowdown in Apple's core segment, the company is betting on the services segment. This segment includes products such as Apple Pay, Apple Music, Apple Appstore and Apple Carplay. Already, this segment has begun to generate excellent growth for the company with quarterly revenues of more than $ 10 billion.
It also plans to launch a video streaming service to compete with Netflix (NFLX). While the streaming industry faces high competition, Apple could become a big player in the industry due to its large installed base. It has also begun to create partnerships with other television companies such as Samsung and LG. However, this will not be an easy industry for the company because it will pursue other companies such as Netflix, Disney (DIS) and Amazon, which have a large library of original programming.
In the future, Alphabet has a number of advantages over Apple. First, Apple is already established in China, where it earns revenues of more than $ 50 billion. The problem is that China's Apple smartphone competitors such as Huawei and OnePlus are gaining market share, which has led to a slowdown in Apple's growth. The alphabet, on the other hand, has more space to grow in China through its Android product. The almost monopoly of Android in China will be maintained because Android is free to use for manufacturers. As the economy grows, Alphabet could generate more revenue from the app store in China. The company is also considering relaunching the search product in China.
Second, Alphabet has invested billions of dollars in the Waymo product. In the Alphabet reports, Waymo belongs to the Other Betting segment, which represents a small amount of Alphabet's total revenue. This could change once Waymo starts generating revenue. In fact, analysts value Waymo alone at more than $ 100 billion. In a recent note, UBS analysts say Waymo will generate more than $ 114 billion in 2030.
Third, Alphabet will continue to be the market leader in online marketing. It is expected that this industry has a CAGR of 21% until 2026. Of all the major companies in this space, Amazon, Twitter (TWTR) and Snap (SNAP), the best positioned is. This is due to the search ability itself and does not have a significant competitor. He owns Android, where he does not have a major competitor and also owns YouTube, another platform with no significant competitor. With this ecosystem, GOOG will continue to be the largest advertiser in the world.
Fourth, GOOG has invested billions through the Google Ventures platform. The notable companies in which he has invested are Uber (UBER), Slack and Stripe, among others. He had also invested in public companies such as DocuSign (DOCU) and Hubspot (HUBS). Other companies that have been acquired are Jet, Collaborate and Flatiron Medicine. As Uber and Slack will come out this year, the company could see a big return on investments. Apple, on the other hand, does not have a venture capital arm unlike other technology companies such as Microsoft, Salesforce (CRM) and IBM (IBM). In contrast, Apple focuses on private investments such as Didi and Finiser. He has also invested a part of the funds for the Vision Fund. Therefore, from the point of view of the companies, I believe that Alphabet is better positioned for growth than Apple.
In addition, GOOG is a more diversified company unlike Apple. In this, the company has spent years creating products for both consumers and business customers. For the company, relatively newer products such as the cloud are beginning to bear fruit. According to Citi (C), GOOG, which is the fifth largest cloud company in the world, could see its revenue in the cloud reach more than $ 17 billion in 2020. GOOG has also increased its focus on consumer products , with its Google Pixel devices receiving good reviews. Your other devices like Google Home Hub also receive good reviews. He has also ventured into artificial intelligence, cognitive science and medical research. Although these products will continue to form a small part of the general income of the portfolio, I believe that diversification is an advantage for the company. Apple, on the other hand, has been a successful consumer-oriented company. This is not all bad because Apple has been really good at consumer products. However, I believe that the diversification of GOOG into all its products gives it an advantage over the real.
The two companies face a series of challenges. Apple faces the challenge of reducing iPhone sales and this week it was revealed that several of its applications are recording the user's screen without their permission. This is risky for Apple, a company that has long been associated as a privacy advocate. Apple also faces the challenge of finding a high-margin hardware product like the iPhone. His recent attempts to enter the smart speaker industry have not been very successful.
Alphabet on the other hand faces the challenge of regulations. In recent years, the company has received heavy fines from the European Union and more similar fines are expected. The company will also be the biggest victim in the Article 13 rules proposed by the union. It also faces the scrutiny of lawmakers from several countries about spreading false news through its platforms. The two companies face the challenge of companies such as Netflix and Epic Games, owners of Fortnite, which are moving away from the respective application stores.
Verdict: Alphabet wins
To be clear, GOOG and Apple are great companies that have changed the world for the better. The two companies also face a series of challenges in terms of privacy and regulations. However, as an investment, I think what is a better company than Apple. First, the company has more than $ 109 billion in cash and very little debt. This means that you will most likely start returning cash to investors in the form of dividends within a few years. Second, GOOG still has the largest market share in online ads and there is no close competitor. This is different from Apple, whose main product faces a great threat from other phone manufacturers such as Huawei, Samsung and OnePlus. Third, as mentioned above, GOOG is a more diversified company than Apple that generates revenue from both business customers and individuals. Fourth, GOOG has invested billions in research areas focused on cognitive solutions, health and biosciences, and life sciences, among other areas. These investments could help him become the biggest player in these industries.
Revelation: I am / we are a long time, AAPL. I wrote this article myself, and expressed my own opinions. I am not receiving compensation for it (except for part of Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.