If You Own Alphabet Inc (GOOGL) Stock, This Should Nag You

Apple and Alphabet seem to be in a healthy partnership, but stranger things have happened

By James Brumley, InvestorPlace Feature Writer


The world technology companies live in can be a funny place, rife with love/hate relationships and frenemies. Case in point: Even as Apple Inc. (NASDAQ:AAPL) wages a nasty legal battle with Qualcomm, Inc. (NASDAQ:QCOM) over licensing fees, Apple still uses Qualcomm chips, and QCOM still relies heavily on AAPL as a customer. So, it comes as no real surprise that as much as Alphabet Inc (NASDAQ:GOOGL) and Apple are competitors on the smartphone and app battlefield, in some ways they’re still partners.

If You Own Alphabet Inc (GOOGL) Stock, This Should Nag You
Source: Shutterstock

That is, Alphabet pays Apple a tidy sum to make Google the default search engine on the iPhone, and Apple relies on that ever-rising annual fee to help drive its impressive profit growth.

Some have essentially described the relationship as symbiotically dysfunctional, meaning both parties hate helping the enemy, but they know the deal helps themselves by just a little more than it hurts. That’s why most owners of GOOGL stock aren’t terribly worried about the arrangement.

Thing is, after giving the matter some more critical thought, Alphabet has a lot more to lose should Apple choose to walk away than Apple does.

$3 Billion, And Rising

Take the number with a grain of salt simply because it’s only a guess, but Bernstein analyst Toni Sacconaghi reckons that Alphabet is going to pay Apple about $3 billion this year for pre-setting Google as the search engine on iOS devices.

It’s only a guess, but it’s a fairly educated one.

Based on court documents that confirmed Alphabet forked over $1 billion for that privilege in 2014, and then extrapolating the growth of the iPhone in the meantime, Sacconaghi concludes this year’s tally is on the order of $3 billion. The fee is booked as licensing revenue, which is part of Apple’s fast-growing “Services” arm that also includes app and subscription-based revenue.

The fee will also grow every year, assuming Apple continues to sell more devices — it’s billed on a per-user basis.

Who Wins in This Relationship?

The upside and downside of the relationship are the ones most GOOGL stock holders assume. The upside is, Apple’s reach is far and wide; iOS users account for an estimated half of all of Google’s mobile search revenue. The downside is, that revenue costs Alphabet $3 billion per year.

There are pros and cons for Apple too, though.

The encouraging aspect of the relationship is a very easy (and high margin) $3 billion to do what it was going to do anyway, but by partnering with Google, Apple may be unable — legally or practically — to seek out other fees from the names behind other apps, like shopping, ride-hailing or map apps.

It’s a not-so-touted secret that should spook owners of GOOGL stock: Alphabet needs Apple a lot more than Apple needs Alphabet.

Apple could replace Alphabet’s $3 billion much easier than Alphabet could replace the 1 billion-plus devices running iOS, most of which have (or still have) Google is the default search engine.

Again, these Apple fans account for roughly half of Alphabet’s mobile search revenue, which is the fastest-growing piece of its revenue mix. There’s not an alternative mobile operating system for Google to tap; Android and iOS are it. Apple, meanwhile, could do deals with Amazon.com, Inc. (NASDAQ:AMZN), Uber, Yelp Inc (NYSE:YELP) or a myriad of other names to make those services’ apps come standard in future versions of iOS.

Bottom Line for GOOGL Stock

It’s certainly not a reason for current or would-be shareholders to scurry away yet. Apple and Google seem to be happy enough to work together, and if nothing else, neither party has to worry about the other’s survival. That wouldn’t be the case with a company like Uber or Snap Inc (NYSE:SNAP), both of which are still bleeding money.

On the flipside, never say never.

Facebook Inc (NASDAQ:FB) and Zynga Inc (NASDAQ:ZNGA) were once considered inseparable too. When that relationship fell apart, Facebook thrived while Zynga imploded. Alphabet is certainly on better footing than Zynga was then, or is now. But that surprising change of heart verifies that even seemingly healthy relationships can sometimes hit the skids.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. Follow him on Twitter.

Article printed from InvestorPlace Media, https://investorplace.com/2017/08/if-you-own-alphabet-inc-googl-stock-this-should-nag-you/.

©2018 InvestorPlace Media, LLC