Did Alphabet(Google) really beat Apple as the most valued company? Did it?
I see a lot of people sharing this news, some facts and detailed understanding of what powers these two companies and their stocks. [ Caution: Long read]
Facts
a. Alphabet (Google) was higher than Apple for during after-hours trading yesterday (Feb 1st 2016), but is currently $10bilion less than Apple. A lead that lasts then 24 hours is best described as a blip.
b. But it seems like, eventually Alphabet (Google) will overtake Apple for a consistent period in this quarter.
The facts as of today hint towards that Apple stock may not rally much in near term but Alphabet’s might.
Lets start by looking at revenue lines of both companies
Apple’s revenue lines
I- pads: Sales are decreasing and long term growth is under question. 21 million units sold in Oct-Dec 2014, while only 16 million sold in Oct-Dec 2015. The figures were 26 million and 22 million for the preceding years of 2012 and 2013.
So How many I-pads will be sold per quarter 5 years from now. The answer might be less than 10 million or lower. With phone becoming powerful and better —who needs something between a laptop and a phone?
Mac: The sales are not increasing as overall computer sales is not seeing much growth. Once again when compared to last year same quarter — we see a decline, not as sharp as Ipads but a decline none-the-less. Last few years has shown very little growth in Macs, so overall this will not be the growth engine for the company. They sold around ~20 million units in 2015 up from ~19 million units sold in 2014.
Appstore: This is increasing but revenues are mere $6billion, again a small blip for a company making ~$200 billion in revenue. Also note they get paid 30% only for in-app purchases so the commerce on Uber, Amazon, Lyft, AirBnB etc. get Apple nothing.
So this isn’t going to directly drive big revenues.
I-phone: In a nutshell, Iphone is Apple — making $150 billion+ in revenues and driving much of the Apple ecosystem.
Iphone saw its first sales stagnation since its launch. China was a culprit and whether this was a blip or not, time will tell. But there is no doubt that Iphone growth prospects are weak and phone companies have gone from Hero to Bust pretty quickly in the past.
The other i, which started the journey for Apple, the i-pod is almost dead and irrelevant to the overall mix.
Other future income streams like watch, TV, Pay, Cars are speculations and data is not publicly available. Also, there is enough skepticism about their ability to dominate these like they did with I-phones.
So much of Apple’s rally in stock in going to be around two factors:
a. How does Iphone perform in the future and how stock traders think it will fare in the future.
b. How much upside is given to these Other bets or what new data about these bets creates hope for another I-pad, I-phone like success.
Alphabet’s revenue lines
Alphabet (Google) has 6 properties with over 1 billion users
Search: The backbone of google and source for majority of Google’s revenue (80%+). Difficult to pin down numbers as Google doesn’t provide revenue break up.
Search clicks continues to grow but not rapidly. I suspect the 30%+ growth seen in paid clicks is a result of Youtube and other advertising formats being rolled out.
Google’s now sees more than 50% search on mobiles but mobile search cost-per-click is lower than desktop, so overall we see a 11% decline in average cost per click rates. A cause for long term concern. Maybe! But monetizing mobile search is a huge priority within Google, maybe even the top priority and hence chances are they will solve this one and come on top.
Theres still headwinds to work through but it looks steady and in-control. But one should keep tracking underlying variables and see if they shift in favor of or against Google.
Long term, Search will be a major reason for boom or drag on the stock. Ad revenues don’t decline sharply overnight and since they are still increasing, the probability of a bust or downslide for next 3 years isn’t very high.
Youtube: This is gaining ground and video monetization is climbing up and can potentially fill any gap appearing by weakening of search revenues on mobile. Youtube is huge already and has enough growth ahead of it. It was approx. 4 billion in revenues in 2014 and is expected to be close to $6.5–7billion in 2015 and finally operationally profitable.
This is expected to grow to $20 billion in itself by 2020, and maybe more. Video Advertising is growing and another 1 billion people might get connected. To give you perspective $20 billion is approximately Facebook’s revenue in 2015. So, thats a great place to be in.
But once again, being a consumer software product in competitive landscape, there are two/three immediate cause for concern.
a) Will Youtube compete with NetFlix. Hulu etc. for attention span of Families or collective viewing? Youtube has cracked the personal viewing space but its ability to translate its advantages to family viewing space could be game changer. From a consumer behavior point of view people will continue to split time between personal and family screens.
If Youtube does this — it can probably outdo its $20 billion revenue expectation by 2020 very easily.
b) Will mobile friendly formats like Vine, Snapchat Stories, Twitter Moments etc. become the norm and make video content lasting 2–5 mins boring? Should youtube take their top 100,00 creators and start a new channel for shorter content and provide them tools to create and upload them from their cellphone?
Though, this doesn’t affect Youtube’s growth in next couple of years, it should be a cause of concern.
c) With all the contextual data, Facebook videos could be a superior platform than Youtube for video Ads. There is a premium in advertising if you are no.1, Youtube will like to own that premium.
So all in all, growth looks guaranteed in the 2–3 year horizon, even 5 years horizon but domination is something Alphabet shouldn’t take for granted and work hard for.
Gmail: 1 billion people exchange emails using Gmail. That sounds great! But how many ads do you click on while emailing — very close to Zero. It doesn’t do much for direct revenue but is probably the only logged in Google product on most laptops and phones allowing Google precious data about your identity and preferences. It’s Google’s only hope to create tools for marketers to personalize and cross-promote their ads on different screens and products. Facebook does this really well.
Directly, GMail doesn’t do much for Ad revenues. So from a stock perspective will not have a big impact, but within Google — this is an engine which can power other products.
Android: Again much like app store — wont be big revenue driver but allows Google to control a very important market segment creating other opportunities. Revenues are estimated to be around $3billion and may seem a 2X growth over next 5 years, but will continue to a small portion of overall revenue of Google.
As a product, its already 1billion+ devices and will continue to see strong growth as the next 1 billion people join the mobile internet.
Stock market does value who controls the OS on phones . Therefore as Android gains users, it will have impact on stock prices but not much on revenues.
Maps: This is where revenues will be difficult to come. Its a great product used by billions and the data it gives them is valuable but there will be limited direct monetization of this product.
Chrome: Another product used by 1billion plus users. But as far as revenues go, the monies come from search done on its browsers. So effectively, the arguments put forth for search hold true from Chrome and in fact chrome revenues comes under search revenues. Based on Mozilla figures, Chrome as a standalone browser would make $1–1.5 billion, but since Chrome based search means Google pays no TAC, the overall impact on search revenue will be more.
So overall, from its current set of Star products — Search and Youtube are important to drive overall revenues and long term profitability.
Other Bets: Google has a lot of its cards open on the table, which makes it easier for people to price future potential of some moonshots. Driverless Cars, Nest, Calico, Google Fiber etc are all excellent projects.
Alphabet has already said in 2015 Q4 update that 40 car makers are going to deploy Android Auto in their cars. And if driverless cars are here by 2017–18, this may be a huge bet for Alphabet. Car manufacturers are not great at software, and would rather let Google do R&D and let them update cars on the fly. Alphabet would love it if that happens sooner and it can convert its years of RnD of autonomous cars into a reality by powering 100s of millions of cars in the next decade.
Nest provides access to another interesting and big market — Home automation.
But as of now, all of this is speculation and people wait eagerly for numbers.
Now lets build scenarios to compare how the future might look for each company.
Outlook Apple
Scenario 1
Iphone has been replaced by another new device which caught us all unawares. A more powerful phone, a hybrid between phone n remote control for life. I dunno, but the possibility lurks.
Macs, Ipad, Appstore — things of past — still maybe worth billions but cannot justify a $1/2 trillion valuation.
This maybe Apple’s worst nightmare. Making the highest revenues in the world but having a set of dying products.
Senario 2
Apple is able to create an ecosystem for us to safely and easily integrate technology into all facets of life. We have an apple TV, we pay using apple pay, Apple has a remote like wand which controls and commands all apple devices (or maybe our voice does that) and all connected devices move in unison and provide great ease of use.
Iphone continues it rise and becomes the must have device to control and navigate our digital landscape.
So in effect— Apple slowly takes over our tech device ownership. So if each user gives Apple its $2000 of annual tech spend or even $1000 and they can have a 1 billion users — they have 1 trillion $ in revenues.
I am sure Apple is playing for something close to this scenario.
Scenario 3
Somewhere in between — Apple dominates some devices and doesn’t dominate the whole ecosystem. Its competing now with multiple players in multiple categories and multiple markets.
Not a battle Apple will easily win despite its deep war chests of 100’s of billions of $.
So for apple to go up — it needs a close to Scenario 2 to happen in the long run. But since thats uncertain — we are faced with immediate scenario of Lower probability, more uncertainty and hence lesser present valuation.
Caveat: Little is known about Apple’s other bets — Will there be Apple cars, Apple something else, whats in the pipeline? Wall street and industry experts don’t know and hence difficult to value that.
Outlook Alphabet
scenario 1
Lets say Google hits one home run in these bets. Nest for example — if Nest can do for Google what Iphones did for Apple. Provide a device in every house — it will be pretty big. Not as big as Iphone but pretty big
Not as big also because, # of households needing a thermostat << # of individuals that will use mobile phones.
Or if Driverless cars becomes a mainstream thing and Android Auto becomes the default technology to most car manufacturers. Big, Huge market.
Either will be huge and will give stocks a huge boost. Lets not rule out life sciences and bio-tech bets. It continues to be an undervalued sector and very ripe for disruption.
Google Search (along with Chrome) continues its leadership as worlds no.1 digital advertiser and stays on top of its game. Youtube remains as amongst the top 2 ways to watch and monetize videos online.
In this scenario Alphabet will most likely try to race towards worlds first $1trillion company.
scenario 2
Search ads choke: For whatever reason — search ad revenues flatten out and start showing steady decline coz people are finding and discovering information in other ways.
Youtube: Most likely it will continue to dominate video revenues but cracks may start opening up, causing concern on long term income generation prospect of Youtube.
Other bets: Mild success here — but no clear leadership position and much like apple’s bad scenario — Google is left competing in cars, life sciences, home automation, mobile OS etc and finds itself a not dominant force in any of these bets — valuations and future prospects will take a hit.
All in all, it will mean the decay of Google will start and valuations will drag, fluctuate or drop.
Most likely it could be a combination of these scenarios — maybe search continues to rise and so does youtube and every other bet fails to make a dent (Unlikely but possible). Or maybe — search/youtube — plateau out and start dragging but something new becomes a blockbuster.
Google has a lot of clear long term bets and has a proven record of building highly used products (Youtube, Android, Maps, Search, GMail, Chrome), so faith lies in them to create future success stories.
The Wall street Bet on Google (Alphabet) to dominate the future has always been bigger than Apple as shown by the difference in P/E ratios. (They are also different industries, so that helps)
Final word
Today, Apple makes more revenues than Google, Facebook, Amazon etc. combined. But hey, Microsoft also makes more revenue than Google+Facebook.
The question in valuation isn’t just how much money you make right now, but how well positioned are you to defend your revenue streams, grow them and create new ones in the future.
I think Google presently offers a better future bet than Apple and may exceed Apple in valuation this quarter. In the long term race for most valued company might have more contenders like Facebook, Amazon or maybe even some Chinese companies.
I am Rish, Co-founder of Letsintern, acquired by Aspiring Minds in Dec, 2015. Letsintern is one of India’s largest student-organization platforms. I am a hard working adrenaline loving technology junkie. An Ironman triathlete, certified scuba diver, football enthusiast, an avid traveller, marathon runner who reads, writes and codes in spare time. Follow me on Twitter :www.twitter.com/rish_says or Connect with me on Linkedin: in.linkedin.com/in/profilerish/
