Apple and Google: business models, products, and market competition

Apple, Google

Analysis of each company

Apple is a designer and marketer of consumer electronic devices and software. The company is also vertically integrated with respect to retailing, operating its own stores and functioning as one of the biggest online retailers in the world. Apple's primary products are the iPhone ($80.4 billion), iPad ($32.4 billion) and portable computers ($17.1 billion). Other billion-dollar products are desktop computers, iPod music players, iTunes, peripherals and software (Apple 2012 Annual Report). Apple's customers are primarily consumers who purchase through retail channels, either from Apple or authorized third party retailers. Customers also include small and medium-sized businesses, educational institutions and government. Geographically, Apple is geographically diversified. Leading regions are the Americas (36%), Europe (23.2%) and Asia-Pacific, ex-Japan (21.2%). Suppliers to Apple include manufacturers like Foxconn that assemble the products and the different component suppliers, of which they are dozens for any given device. Most suppliers are located in China. The company's leadership underwent a significant change in 2011 with the retirement and death of founder Steve Jobs (Potter & James, 2011). The current leadership consists of CEO Tim Cook, CFO Peter Oppenheimer and the company's functional managers involved in the design and marketing of its products. Most of the C-suite team was with the company under Jobs, so there is a high level of continuity in the leadership of Apple, though Jobs was a driving force in the development of many hit products.

Google is primarily an advertising company. The company has a leading market share in mobile operating systems (Android) and a large share in Internet browsers (Chrome) but does not earn much revenue from either of these. Advertising accounts for 87% of the company's revenues, with the newly-acquired Motorola Mobile 8.2%). The company competes directly against Apple is mobile operating systems and Internet browsers. Otherwise, Google's business model is to drive traffic to its sites and its partner sites, and then sell advertising based on the volume of the traffic and whatever other information Google has about the visitors to a particular site. Google is the industry leader because of its exceptionally high web traffic -- it owns several of the top 20 websites in the world (Alexa.com, 2013).

Google has a diversified customer base. As the world's largest seller of online advertising, Google sells to a broad base of marketers in all fields. Google's customers are global in terms of their geography. There are only a few countries in the world, notably China, where Google does not have a dominant market share. Google's suppliers are the Internet surfers whose eyeballs Google sells to its advertisers, and the talent within the company who builds the sites that attract the Internet traffic. Google has retained its leadership team for several years now, including CEO Eric Schmidt and co-founders Larry Page and Sergey Brin, both of whom still have major roles within the firm. This leadership team stewarded Google to its current position of market dominance.

Stock Charts

The stock charts can be found in Appendix A. Apple's IPO was in 1985, and the company has experienced a typically wandering pattern since that point, mirroring the fortunes of the company and the broader market. Apple's recent history is tied more to its product successes. The company bottomed out in early 2009 at less than $100, but its stock has increased steadily and significantly since that point. The decline in late 2008 was in line with market declines, perhaps on the expectation that Apple's fortunes would be tied to broader economic performance. We know now that this was not the case. Apple's new product introductions since that point -- the iPhone and the iPad -- have accelerated the company's growth, so that the level of the stock increased each year from Jan 2010, Jan 2011 and Jan 2012. Its most recent history, however, shows a steep increase to over $700 and then a steep decline since that point. Its highs reflected tremendous profitability, but its market fundamentals -- it does not lead smartphones by operating system, personal computers or tablets by operating system -- were misaligned with a valuation that made it the biggest company in the world by market cap. Apple instead has dropped into the $400s. This reflects market belief that there are no hit products imminent to spur growth, and that the dividend payout rate is relatively low for its earnings.

Google went public in 2005 and its stock has had a general upward trend since that point. There was a decline in late 2008/early 2009 with the rest of the market, something that reflected a reduction in online advertising as the economy entered recession. Since that point, however, the company's stock went through a period with little change (in the $600 range on Jan 1, 2010, Jan 1, 2011 and Jan 1, 2012). Since the beginning of 2012, Google's stock has increased. With the economy beginning to grow again, online advertising is once again a growing market. The increased dominance of Android is also something that has provided optimism for investors that Google will be able to continue with new hit products, or at least leverage existing market share to earn revenue.

Overall Financial Analysis

There are a few key characteristics of financial data that are important. For equity investors -- especially when dealing with companies that have low dividend payout ratios -- the growth rate is critical. Both of these companies have strong growth rates. The margins are important as well, and both companies have very healthy margins. Liquidity and solvency are also worth considering, and again neither of these companies has any issue whatsoever on its balance sheet. The only issue is whether the past growth rates can be sustained.

Both companies are ridiculously profitable. Such hyperbole is warranted when the numbers are examined. Apple earned $41.7 billion on revenues of $156 billion in FY2012. These figures represent increases of 61% and 44.5% respectively. For a company this large to have growth figures like that is exceptional. Apple now has $97 billion in long-term investments on its books, no long-term debt, $39 billion in cash -- so $133 billion in money it can use for whatever project it wants. This is actually a detriment because the company has trouble finding worthwhile investments. With an exceptional income statement and the best balance sheet in the history of financial accounting, Apple's finances are exemplary.

Google's finances are almost as good. The company earned $10.7 billion last year on revenue of $50.1 billion. These figures represented increases of 10.2% and 32.3% respectively, and a net margin of 21%. As with Apple, Google is flush with cash. The company does not use long-term investments to store its cash, but instead has $48 billion in the bank. The company took out $3 billion debt it didn't need because its credit is so good it borrows at a negative real rate. With Google, the revenue and profits are both growing, the balance sheet is impeccable, and the margins are high. There are no red flags with Google's finances.

Accuracy and Reliability

For making an investment decision, past performance is only one important consideration. The data provided by the financial statements is important for understanding the past performance of these companies. For example, knowing that Google only makes money on advertising despite its numerous other high-profile services is important for an investor. Knowing the breakdown of Apple sales by product is also important. For example, Apple's past sales performance hints at the product life cycle in consumer electronics. The iPod, which has a reputation as a massive hit, has seen its sales decline for years. This is what the future holds for the iPhone and iPad products as well, eventually. Thus, this past data is valuable for making investment decisions because of the information it provides about the nature of these businesses.

However, past data for these two companies says little about the future growth prospects of either, but especially of Apple. With a short product life cycle, Apple is forced to continually launch new hit products in order to maintain sales growth momentum. In lieu of that, the company will still continue to make money, milking its cash cows, but will not be a good investment for growth and may not pay enough in dividends to offset the prediction of slow growth. Thus, the key to investing in Apple is whether one believes that a new hit is on the way, or that the company will dramatically increase its dividend payout, two things that are not in the financial statements. For Google, the financials are very reliable. The company has main business, and it is so dominant in that business that it faced an antitrust suit. Its revenues have a steady growth trajectory that does not rely on the product life cycle. Therefore, Google's financial are not only accurate, but useful to help predict future performance.

Investment Recommendation

The better investment for my client is Google. Note that the quality of the company is important, but so is the current market price. Google trades at a forward P/E of 18.23, double that of Apple. The market, therefore, already agrees that Google has better growth prospects. Both companies have excellent financials and strong underlying businesses. Apple is more cyclical in nature, but is also better-diversified. Google has a more stable business, but only has one business, and has not figured out how to make money on either Android or Chrome.

The cyclical nature of Apple's business holds that it needs a hit product to continue to grow. The market is pricing in the eventuality that Apple will not have another product in the iPad or iPhone class of hits. With a low multiple, the market is predicting little further growth for Apple. The company has cash cow products, but if it cannot innovate faster than competitors, it will struggle and eventually lose market share even further. The result is that Apple could go into decline.

Essentially, this decision is made on downside risk. While Apple could have another hit product, it might also go into a slow decline as its core products begin to age. Google, on the other hand, has a business that is clearly dominant. Buying Google stock is not a bet on the company eventually making money on Android or Chrome; it is an investment in the future cash flows from its advertising business.

On the basis of Google having the more predictable, reliable business, I assess that Google is the better investment. Apple still has downside if the company's core products become old; Google's core business has years of growth potential in front of it.

Appendix A: Apple and Google Stock Price Charts

All charts from Yahoo! Finance

Works Cited:

Gustin, S. (2013). In major victory, Google dodges federal antitrust suit with FTC deal. Time Magazine. Retrieved March 15, 2013 from http://business.time.com/2013/01/02/google-set-to-dodge-federal-antitrust-lawsuit-with-ftc-deal-report/

Alexa.com. (2013). Top sites. Alexa.com. Retrieved March 15, 2013 from http://www.alexa.com/topsites

MSN Moneycentral: Apple. (2013). Retrieved March 15, 2013 from http://investing.money.msn.com/investments/stock-price?symbol=AAPL&ocid=qbeb

MSN Moneycentral: Google. (2013). Retrieved March 15, 2013 from http://investing.money.msn.com/investments/stock-price?symbol=GOOG&ocid=qbeb

Potter, N. & James, M. (2011). Steve Jobs dies: Apple chief made early personal computer, created iPad, iPod, iPhone. ABC News. Retrieved March 15, 2013 from http://abcnews.go.com/Technology/steve-jobs-dies-apple-chief-innovated-personal-computer/story?id=14383813

Yahoo! Finance (2013). Retrieve March 17, 2013 from http://finance.yahoo.com/q/bc?s=GOOG&t=my&l=on&z=l&q=l&c=