For a long time, Apple (AAPL) has been the most valuable company in the world. It was something we all ate up. Steve Jobs was revered as a God and became the subject of two different biopics. Apple stores popped up all over the country. Lines wrapped around the block for the new iteration of the iPhone or the iPad, with people ready to shell out big bucks for whatever update was thrown their way.
But now? Well, yesterday, Alphabet (GOOG) lapped Apple as the most valuable company in the world, toppling Apple from a perch where it sat for about four years. At least, it did for a little while. In and of itself, that’s not really big news. The stock market is a fickle beast and the shift reversed itself the next day. The two remain agonizingly close, so it wouldn’t be surprising if they flip back and forth over the next few weeks.
However, symbolically, it could represent a very real changing of the guard. For years, Apple has been the symbol of innovation and exceptionalism for markets. The reality, though, has been that Apple has increasingly been satisfied with resting on its laurels, raking in mountains of cash and paying it back to its shareholders. However, with this last round of earnings, Google has simultaneously managed to show an ability to pull in tons of cash while also continuing to wear the crown for a driver of innovation for the future.
Earnings Show a Narrowing Gap
The real driver of this shift comes down to two sets of Q4 earnings, one good and one bad. Apple, which reported after market close last Tuesday, booked total revenue of $51.5 billion for the quarter, good for a net profit of $11.1 billion. That was enough to make Apple the most profitable company in the world by a long shot, but it still showed cracks, potentially revealing the company reaching a plateau.
Alphabet, meanwhile, couldn’t claim such sterling numbers. Revenues of $21.3 billion produced just under $5 billion in net profits, meaning the company’s profits seem to remain less than half of Apple’s. However, the bigger story here was the future, which is precisely how a company earning less than half the money of another can leapfrog it in value.
Alphabet Opens the Books to Persuade Investors
Part of what is driving investor enthusiasm about Alphabet is, well, Alphabet. The decision to rename the company and separate its books into Google, the search and advertising wing that has been the foundation on which the company is built, and something they have called Other Bets, all of the other stabs at innovation that may or may not pan out.
The success here is two-fold. For starters, Alphabet can show just how profitable its Google segment really is (and boy is it) by revealing just how much of its profits are getting eaten up by operating losses by its bets on the future. Knowing that last year’s profit figures include a $3.5 billion loss on everything in the company that’s not Google allows investors to get a clearer picture of operations. Anyone concerned about profit figures can breathe easy knowing that, should the worst happen, Google can likely just liquidate that part of its business and boost profits by 15% or so.
But, importantly, Google’s not going to do that. Because it’s that Other Bets section that really drives Google’s valuation. Profits are one thing, but a promise of a bright future is another entirely.
When is a Tech Company Not a Tech Company?
At the core of this argument lies a fundamental question: when does a tech company stop being a tech company? Tech companies are supposed to be disrupting things, building new products for a new status quo. But what happens when you are the status quo?
Apple rose to its prominent position by fundamentally remaking the modern world. The smartphone has become a fundamental piece of modern living across the planet, allowing for the computer age to become mobile in a way previously unimaginable. The iPhone, unveiled in 2007, is precisely what drove Apple to the heights at which it currently resides. One needs merely consider the fact that a big part of Google’s rise has been driven by mobile advertising, a revenue stream invented by Apple itself.
However, to argue that Apple is continuing to remake the marketplace in the way it did with the iPhone is a lot harder. In fact, the evidence points towards the idea that Apple isn’t really trying to anymore. Beginning a couple years ago, Apple started making moves that indicated a pretty fundamental existential shift.
Apple added a dividend, started spending a lot of money on share buybacks, and even had a 7:1 stock split to make shares cheaper and more attractive to retail investors. It made sense. Given the growing pile of cash the company had at its disposal, finding ways to return it to the shareholders was a necessity.
However, it was also a sign that Apple was no longer REALLY a tech company.
Innovation and Growth Will Always Drive Markets
The thing is, tech companies, generally speaking, aren’t supposed to do things like offer dividends and buy back stock. Tech companies are supposed to enrich their shareholders by pouring profits back into research and development, driving towards that next product or breakthrough that will take shares to new heights.
Apple’s dividend and stock split were good ideas for the company and its shareholders, but they also represented something of a white flag. Apple would now accept its role as a manufacturer and seller of high-end digital goods instead of constantly trying to develop that next iPhone.
That perception is not entirely fair, as Apple still invests heavily in research and development. However, in a general sense, it’s hard to argue that Apple now represents the future. Apple is the status quo. Which, as far as the stock market is concerned, isn’t the best place to be.
Just look at Wal-Mart (WMT) and Amazon (AMZN), the twin pillars of retail. Wal-Mart makes a lot more money than Amazon, both in terms of profit and revenue. A LOT. Almost four times as much, actually. However, Amazon’s market cap is currently sitting at about $270 billion to Wal-Mart’s $215 billion. Why? Because investors are paying for growth. Amazon represents the future. While its current profits and revenue are dwarfed by Wal-Mart, they’re also growing fast. There’s no real knowing what heights they may reach if Amazon can continue to dominate online retail.
Google vs. Apple
So it is with Google and Apple. Whether fair or not, the markets appear to have flipped on Apple, viewing it as more of a safe, blue-chip bet. Across the board, Apple’s growth appears to have started to stagnate. The iPhone sales are slowing, revenue and profit growth aren’t showing huge gains quarter after quarter, it all point to Apple becoming a known commodity. Google, however, can still boast that future growth that remains so exciting even as it exists in its own status quo.
Like Apple, Google has reached a point where it can easily be considered status quo. It’s domination of search and online advertising has become a massive revenue driver. “Google” is now a verb to describe an internet search, putting the brand in the same rarified air as Kleenex and Band-aid. However, the company’s ability to continue building on this would appear to be more scalable into the future.
For Apple, increasing market saturation is likely to continue eroding some of the iPhone sales that have so long been driving earnings. The company will likely still make money hand over fist, but the smartphone revolution appears to be coasting to its finish. The immense wealth directed to Apple for creating the smartphone may have reached an end. Apple is now one of many companies selling smart phones, and its profits now rely on continuing to offer a superior version of a familiar product. It’s a good business to be in, don’t get me wrong, but it’s not the one that got Apple to where it is now.
Google, however, only seems to keep advancing in its core businesses, pulling in more ad revenue quarter after quarter. Which, more than anything else, is what is really matters to investors. Potential moon shots or not, it’s the very real growth in revenues and profits that Google keeps showing quarter after quarter, year after year, that keeps its stock price in overdrive. Google may be the status quo, but it appears as though there’s still more than enough juice to that status quo to keep Google growing well into the future.
And this is in addition to its portfolio of Other Bets. For the time being, even if it’s just perception, Google is the brand investing in bringing new, world-beating disruptive tech to the market. It’s still sinking its profits into drones and driverless cars, products that could themselves drive a new wave of growth and profits for the core company. For all of the very real, tangible growth showing up on the balance sheet, there’s also the promise of even more explosive, world-changing growth down the line. And the combination of the two is a pretty heady mix for investors.
Only Time Will Tell if this Sticks
Of course, passing Apple in market value for one day doesn’t mean a whole lot. It could be that, over the course of the year, Apple will do what needs to be done to show the market it’s got more tricks up its sleeve. Or, it may even just use its massive pile of cash to boost its status as an income stock so high it can still jump back into the top spot. Even now, rumors swirl about Apple buying a major content company as part of a bid to build its own streaming service to tighten its grip on the fiefdom of Apple users and cement Apple TV as a must-have device.
Still, it feels like this is real. Google is deeply embedded in markets that continue to seemingly have limitless potential. What’s more, it appears to be well positioned to keep pushing its reach and creating new markets. Speculative as that may be, it’s that sort of revolutionary change that drives the kind of explosive growth and revolutionary change that really gets investors excited. It was the sort of thing that took Apple from a market cap of about $200 billion to over $700 billion.
Apple has a good thing going, to be sure, but it seems as though Alphabet is the company that’s really betting on the future.
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