Apple is worth more than Google. Huh? This doesn’t make sense to me.
Let’s start with the obvious: Google makes more money than Apple does. It had earnings of $10 billion over the past 12 months, compared to $8 billion for Apple. And while both companies’ earnings are growing fast, Google’s are growing faster.
But here’s the clincher: Google’s earnings were on less than $20 billion of revenue — that’s what I call a profit margin. Apple, by contrast, needed more than $30 billion of revenue to get its $8 billion of gross profit.
Of course, when it comes to stock valuations, the present doesn’t matter nearly as much as the future. So what does the future hold for these two franchises?
They’re both strong technology giants with very large "moats". But Google is stronger, and its moat is bigger. It owns search, certainly in Europe and the Americas, and it’s making strong inroads into display advertising as well. Sam Gustin might be kvetching about "the toll being inflicted on Web advertising by the slowing economy," but the growth rates are still pretty torrid for what is now a reasonably mature industry:
Karsten Weide, an analyst at IDC, told Bloomberg that online ad spending grew 18.9 percent in the second quarter, a growth rate 7 percentage points lower than a year ago. Were it not for the slumping economy, web ad spending would have grown by more than 20 percent, she said.
19% market growth? I think Apple would be very happy with that. And remember that Google is increasing, not decreasing, its share of total online ad spending. Over at Apple, by contrast, the iPod/iTunes duopoly can’t help but see its market share eroded going forwards, as DRM-free online music stores start competing on price, the record labels try to cut Apple down to size, and the marginal utility from buying your fourth or fifth iPod starts to decline.
Apple’s phone business looks great right now, but the industry is notoriously cutthroat, Apple doesn’t have the degree of control it’s used to elsewhere, and in any case handset margins are never going to be as big as margins on iPods or MacBooks. Yes, the iPhone app store is a very promising business model — but it’s going to be quite some time, if ever, before it makes a significant contribution to Apple’s bottom line.
And then there’s the computer business. Macs are selling well, at very high margins. But Google’s muscling in on the computing business too: over the long term, it makes sense to do all your computing in an ever-improving cloud than it does on specific, individually-owned pieces of hardware which always, eventually, break. The more important the cloud, the less important the computer, and the less important the computer’s operating system, too.
Howard Lindzon, by contrast, thinks the stock market is right, and that Apple should be worth more than Google. Two of his arguments are weak: that "social search" will make Google obsolete (I’ll believe it when I see it), and that "MacBooks are getting cheaper" (no they’re not: Apple’s entry-level laptop has been priced between $1,000 and $1,100 for years, and it’s going to stay there).
Howards best argument is that a falling Google share price could become self-fulfilling: "if the stock lingers between $500 or worse yet, drifts lower, you will see a brain drain of epic proportions," he says. Google’s competitive advantage has long been that it was smarter and richer and one or two steps ahead of the competition. As it matures, it might not have the same ability to attract the very best and the brightest.
But if Google has job risks, Apple has Jobs risk — which is much bigger and probably just as imminent. No one at Google is even as important to the company as Jonathan Ive is to Apple, let alone Steve Jobs. If I’m holding a stock as a long-term investment (which is the only sensible way to hold a stock) then I don’t want to run the risk that the company will founder the minute the CEO exits.
And talking of the long term, the option value of all those crazy Google projects which never make any money is huge. There’s a good chance that, eventually, one of them will take off in a big way, and if it’s energy-related, it could make Google’s present business look positively puny.
Google stock is volatile, just as the founders said it would be in their prospectus. But if I was going to sleep today to wake up in ten years’ time, I’d be much happier with Google stock under my mattress than Apple.