Apple Inc. vs. Alphabet Inc: Value or Growth?

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Choosing between buying Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL) is the classic choice between value and growth. And if you were confused, AAPL stock is the value play, while GOOGL stock provides the growth.

Apple Inc (AAPL) Stock vs. Alphabet Inc (GOOGL) Stock: Value or Growth?

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While Apple shares have been on fire in 2017 — up 17% — you can still get in for a price-to-earnings ratio around 16, lower than what investors are paying for the average S&P 500 stock. You also get a dividend of 57 cents per share, more than covered by earnings.

GOOGL is the growth play. Revenues increased to $90 billion last year from $55 billion in 2013. This justifies a P/E of nearly 30. The shares are also up 17% over the last 12 months.

Right now, investors prefer value over growth and Apple stock is doing better than Alphabet. But this isn’t the proverbial choice between a rock and a hard place, instead, it’s more like picking between cookies and ice cream. I own both stocks, I have owned them for several years, and I have profited handsomely holding both.

The Case for AAPL Stock

No technology company is as adept at squeezing profit from hardware as Apple.

While other smartphone companies struggle to make money, Apple regularly brings $1 of every $4 in iPhone sales to its bottom line. Its closed ecosystem is perceived as safe and their products last for years.

The current case for Apple stock, however, has little to do with hardware. Instead, services now drive the stock forward. Services like its app store — from which it takes a 30% cut of sales — Apple Music, iPay and iCloud have become huge, with $7.17 billion of revenue in the fourth quarter alone. The success of its services enabled Apple to become a power in the cloud by putting more than $12 billion into capital spending last year. It’s no secret that the cloud is a capital-intensive business, but Apple has been able to out-spend cloud rivals without disturbing its profit machine.

AAPL had over $246 billion in cash on its books at the end of last year, most of it kept overseas. The Trump administration has proposed a one-time tax cut to encourage Apple to bring this cash back to the U.S. That’s enough money to buy companies such as Comcast Corporation (NASDAQ:CMCSA) or Walt Disney Co (NYSE:DIS) outright.

When analysts subtract the Apple cash from its market cap, they find the company itself valued at “just” $460 billion, with a PE of 9 and just over two times sales. If you’re looking for a cheap value stock, poised for an era of unprecedented growth, with plenty of safety and margin for error, they say, buy AAPL today.

The Case for GOOGL Stock

The artists formerly known as Google have a different case to make.

Alphabet has become a cash flow monster, delivering nearly $40 billion in operating cash flow last year. Its revenue grew nearly 20%, and GOOGL’s operating margin is over 25%.

Clouds scale like no invention ever seen before, and Alphabet delivers a global search service for literally nothing. Its Android operating system is on 87% of all smartphones, against just 12% for Apple, and Alphabet doesn’t have to build or sell them. It just watches as customers who own them come to its services.

But with no fanfare, GOOGL has also become a power in hardware. Its Chromebooks now outsell Apple’s Macintosh line with about 5% of the PC market. Alphabet now participates in all the hardware markets pioneered by rivals — from virtual reality headsets to streaming devices — with watches and personal assistants that let you conduct searches of your home or the world with just your voice.

Under CFO Ruth Porat, who joined the company from Morgan Stanley (NYSE:MS) in 2015, Alphabet is finally telling investors how much they’re spending on “other bets” like robots and self-driving cars, and it’s working to make money on those ventures.

The Bottom Line

It’s hard to see a loser here.

The perceived threat to Alphabet is the growing balkanization of the Internet, with national governments seeking to control what people see and say within their borders, and who can profit from it. That has yet to impact GOOGL, but even the perception can hurt a stock.

AAPL is currently benefiting from a global flight to safety. Its enormous cash position, its strength as a luxury brand, and its growth in services, which could easily be expanded into competition in the cloud with companies such as Alphabet, are all seen in the best light right now.

If pushed to the wall and forced to buy just one right now, I would probably go with GOOG, the non-voting version of Alphabet stock, which shares equally in earnings but sells at a $20 per share discount to the GOOGL shares.

But both companies are like General Motors Company (NYSE:GM) was in the 1950s, International Business Machines Corp. (NYSE:IBM) was in the 1960s, and Halliburton Company (NYSE:HAL) was in the last decade. These are their good old days. We know they will end someday, but that day is not today.

Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, DIS and GOOGL.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.

 


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/apple-inc-aapl-stock-vs-alphabet-inc-googl-stock-value-or-growth/.

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