Will Google Overtake Apple's Market Cap?

These companies operate in divergent markets

Author's Avatar
Nov 03, 2016
Article's Main Image

With Apple’s (AAPL, Financial) device sales declining, its market cap is being wiped out in the billions of dollars with each passing quarter.

As Apple keeps edging lower – the stock is down by 6.5% in the last 12 months – Alphabet’s (GOOG, Financial)(GOOGL, Financial) prospects of becoming the world's largest company in terms of market capitalization are getting brighter. Alphabet is up by 7.48% in the last 12 months, and there is only about a $50 billion difference between their valuations.

One big reason why this could happen sooner rather than later is how Apple’s top line has been growing over the past few quarters. The Cupertino, California smartphone maker is faced with an increasingly competitive and highly penetrated smartphone market. According to Gartner (IT, Financial), double-digit growth in the smartphone segment is essentially over.

With around 60% of its revenues coming from iPhone sales, Apple’s top-line growth is bound to slow. What’s worse is that any further growth will only come via emerging markets, where the product’s price point will have to be lower than in developed markets.

Add to that the economic headwinds that most companies are facing because of their international businesses, and what you have is not an ideal scenario for healthy growth.

Alphabet, on the other hand, is still an advertising company. Its many different products, such as the search engine, YouTube, Gmail and Google Maps all serve the same purpose – to serve ads. Both traditional and digital advertising markets have been growing with the former now slowing down and the latter picking up speed.

iiYIP1AkcON1SXy43f85YWmo-cUnn4fJACAYCSAUESP554RO7KRHyOFAuBq3iEzUcw_ebSYwY-17XuZsKI8qCoe7quS7ziNRTrWCKLy6-0FoRdMUx5JdtEi2d1slIjT_d4MOQaKykOzwWCQF2Ud-nWI8h4kVSE8FnccHM80eFveIaYd7Fbv0jsIscD-sr8nUohseKxRGJvZ2kIFKztIqqlZvQo2SDVWLmA8unSOlc5Or6ekpL4Yg24xRpZcxIDeAB61w2XI3uTBgadnw

TV and Print Media still hold valuable shares of the market, but digital advertising has grown from a mere 17% in 2010 to near 30%, and that growth is only going to accelerate in the future. The way print newspapers suffered due to the increase in digital editions is case in point, and let's not forget the way Facebook (FB, Financial) has grown its top line to the tune of billions in a short span of time. That’s a clear indication that digital advertising has enough room to support a platform as big as Facebook in addition to the behemoth that is Google.

But a more compelling argument is the fact that Alphabet’s quarterly revenues have grown by 17%, 21% and 20% in the past three quarters. To post double-digit growth rates when quarterly revenues are around $20 bilion to $22 billion is no mean achievement. That’s another clue that points to digital advertising maintaining its high-growth status.

Unfortunately for Apple, its market is not going to grow that fast, and it will only be matter of time before Alphabet replaces it at the top of the charts with the crown of world’s largest company by market cap.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

Start a free seven-day trial of Premium Membership to GuruFocus.