Apple is the most valuable company in the world.
There are always brave challengers, however…and Google is giving Apple a serious challenge as the holder of that title. Last week, Alphabet – Google’s new holding company – passed Apple to become the world’s most valuable company by market cap.
It didn’t last long – Apple regained the lead the very next day – but the two titans are trading blows at the top of the valuation pile. Both companies have basically the same value: around $500 billion. As of this writing, Apple has a market cap of $507 billion and Alphabet is worth $454 billion.
The fact that these two giants are tussling at the top is interesting in itself. What makes it even more remarkable, though, is that Apple makes about 3 times more than Google. In 2015, Apple made $53 billion (their after-tax profit) while Alphabet only brought in around $15-18 billion (estimated 2015 after-tax profit).
If this was a boxing match, Alphabet would definitely be fighting out of its weight class.
So…what’s going on?
Why is the market valuing these two very different companies similarly?
At its core, the stock market is future-focused. That’s why the stock market tends to lead indicators of economic health, such as growth in a country’s gross domestic product, aka GDP.
That means people on Wall Street and Main Street are more excited about Alphabet’s future than they are Apple’s. It means that investors see Apple as a sort of “mature” company while Alphabet still looks like a growth stock.
Example: Tesla Motors
Think of Tesla Motors. At its height, before the recent stock market correction, it had a market cap of $35 billion, approaching GM’s market cap of $55 billion. Things have changed since then but the reasoning behind it remains the same. How can a company that sells about 100,000 cars a year have 2/3rds the market cap of a company that sells over 8 million cars a year? HOW?!
It’s all about the future. Investors expect Tesla and Alphabet to forge forward and create even more value in the world. If the market is pricing Tesla like a company that sells way more cars than they are, then they’re pricing that future expectation into the stock price. They may be heavy overvaluing the company, but there you have it.
So…what does that mean for Apple then? Basically, Wall Street is signalling that they’re just not confident that Apple can continue to outdo itself.
So that must mean that both of these companies, Alphabet and Apple, have something in their makeup that is making people excited about one and sluggish on the other.
Alphabet is a giant advertising company. 90% of their overall revenues (a considerable $60+ billion) come from advertising. Most of that is search advertising, which makes total sense given that the company has about 70% of the global search market.
In addition to this stranglehold they have on the market, their advertising revenues have been growing considerably every year. It’s dropped since 2011, but is still growing at super high rates (around 15% year-over-year).
Apple also relies on a golden goose; their primary source of revenue is the iPhone, which generates more revenue than the revenue from all of Apple’s other products combined. Twice as much revenue.
But while both companies generate a lot of money from one very popular stream…what makes Alphabet different is that it still has fully seven different products in which they have more than 1 billion users:
- Google Play
When you look at Alphabet this way, you start to see how it can be viewed as a kind of technology conglomerate. Think of Alphabet as the General Electric of tech: a massive conglomerate with interests in diverse areas like driverless cars, healthcare, smart homes and more.
Meanwhile…Apple is sort of like the Ouroboros. That mythical creature that eats its own tail.
While Google relies on creating a portfolio of diverse and sometimes interconnected products, Apple has to cannibalize itself every time it wants to make waves. The iPhone killed the iPod and now that the market is saturated with iPhones, they will have to figure out their next big thing if they are to break out of the rut that investors view them as being mired in. They’re taking steps to become more Alphabet-like, with rumors of an Apple car in the works…but there’s not much concrete information out there on that.
The beauty of Alphabet’s approach is that they’re allowing themselves to make many small bets; in doing so they’re employing the strategy of successful venture capitalists. Alphabet sets aside money for their “moonshots” which more often than not will lose money. Last year their moonshots cost them $3.5 billion…but it only takes one big win to generate their next billion-person product, so you do the math.
The most promising moonshots appear to be Nest, Fiber and Verily. These three accounted for much of the $448 million in revenue from moonshots in 2015. When one of these moonshots inevitably takes off, it creates a virtuous cycle of growth that adds incredible value to the company – adding revenues and diversifying the company’s interests, making them more resilient in the process.
Okay. Where does that leave us?
It’s clear that Wall Street is a bull on Alphabet and bearish on Apple for at least a few of the reasons detailed above.
Alphabet is viewed as diversified company with clearly visible growth potential, while Apple is seen as a bit of a lumbering giant. It seems that Wall Street is still in a bit of a “show us the proof” mentality when it comes to Tim Cook’s ability to take Apple to the next step following the passing away of the company’s visionary founder.
Will we see the proof? It’s very likely that Apple is working on something…but until more light is shed, it’s hard to work that into its valuation. Keep your eyes and ears open!