Better Buy: Apple versus Alphabet
Many tech stocks have fallen in recent months as rising interest rates and other macro headwinds sparked a pullback toward more conservative investments. However, a handful of resilient blue chip tech stocks fared much better in this selloff than the speculative growth plays.
Two of the most resistant names were Apple (AAPL 0.17%) and Alphabet (GOOG -1.29%) (GOOGL -1.34%). Both stocks are down around 20% this year, but have outperformed Nasdaqdown nearly 30% since the start of the year. They also haven’t been crushed like hypergrowth tech stocks.
Should investors buy Apple or Alphabet stock now? Let’s assess their core businesses, near-term challenges, and valuations to decide.
Differences between Apple and Alphabet
Apple and Alphabet are often mentioned in the same breath, but they operate completely different business models.
Apple is one of the world’s leading smartphone makers, and its hardware portfolio also includes iPads, Macs, Apple Watches, AirPods, HomePods, and other devices. Its vast ecosystem of software and services – which includes Apple Music, Apple TV+, Apple Arcade and other paid services – locked in 825 million paid subscriptions in the second quarter of 2022.
During this quarter, Apple generated 52% of its revenue from iPhones, 11% from Macs, 8% from iPads and 9% from other hardware devices and accessories. The remaining 20% came from its services segment.
Alphabet’s Google owns the world’s largest online search engine, its most widely used mobile operating system (Android), its main video streaming platform (YouTube), its main web browser (Chrome) and its most popular email (Gmail). It also owns Google Cloud, the third largest cloud infrastructure platform in the world.
Alphabet generated 80% of its revenue from Google’s advertising business in its most recent quarter. Another 10% came from Google’s non-advertising business (including subscriptions and hardware sales), and 9% came from Google Cloud. The rest came mostly from Alphabet’s “other” experimental businesses, which include its self-driving and life science subsidiaries.
Both companies still face macroeconomic challenges
Both Apple and Alphabet are solidly profitable and generate plenty of cash, so they are better protected against rising interest rates than unprofitable companies with negative cash flow. However, neither company is completely immune to other macroeconomic headwinds.
Apple still derives most of its revenue from hardware sales, and its shipments have been strangled by supply chain constraints in recent quarters. It also expects its sales in the Greater China region, which accounted for 19% of its revenue last quarter, to be disrupted by the recent COVID-19 shutdowns.
As Apple’s hardware growth slows, it will likely increase spending to develop new subscription services and new hardware devices. This pressure will likely reduce its near-term margins and earnings growth.
Apple’s revenue and profit grew 33% and 71%, respectively, in fiscal 2021 (which ended last September) as it rolled out its first family of 5G devices. But in fiscal 2022, analysts expect its revenue and profit to rise just 8% and 10%, respectively, as it weathers those tough comparisons and struggles with the chain. ongoing supply and the challenges of COVID-19.
Google’s core advertising business typically thrives in times of economic growth, but struggles during economic downturns. It suffered a downturn in the first half of 2020 as the pandemic spread, but Google Cloud’s growth in the early days of the crisis cushioned that blow.
Its advertising business recovered in the second half of 2020 and Google Cloud continued to expand. That momentum continued through 2021, but an unexpected slowdown in YouTube (to 14% year-over-year growth) in the first quarter of 2022 spooked investors last month. Its commitment to increase investment, even as its advertising business faces unpredictable headwinds this year, has also alarmed investors.
Alphabet’s revenue and profit rose 41% and 91%, respectively, in 2021, as they faced easy comparisons with the first half of 2020. But this year, analysts expect Alphabet’s revenue is up only 16% while its profits are down 1%.
The evaluations and the verdict
Apple trades at 24 times forward earnings, while Alphabet has a forward price-earnings ratio of 20. Apple pays a forward yield of 0.6%, but Alphabet pays no dividends.
I own both of these stocks, and I believe they are both reasonably priced right now. But if I had to buy more shares of any of these stocks, I’d choose Alphabet for these simple reasons: its advertising business isn’t as cyclical as Apple’s hardware business, it’s not heavily exposed to supply chain challenges, it has limited exposure to China, and its stock is a bit cheaper.