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Jonathan Poland
Jonathan Poland
Articles (225)  | Author's Website |

Apple or Alphabet: Race to a Trillion-Dollar Valuation

Together they're valued at $1.03 trillion, but one will get to that capitalization first

February 25, 2016 | About:

Considering the influence these two companies have on the world we live in, it’s virtually assured that one or the other will be the first trillion-dollar company. Placing cash on either stock at this point will double your money unless the world fundamentally changes. How long before an investor can realize 100% will depend on whether the companies can continue to expand their brand presence in the market.

Alphabet Inc.

Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) owns the way we search the Internet. It receives over 95% of its revenue directly from the spectacular algorithm it has built and the cheap and free services created around it to drive more and more advertising revenue.

Advertising is why consumers are able to get so much free stuff in their lives, and it isn’t going away. At least, not as long as investors want to live and prosper in the (mostly) capitalistic society. The question is how long will the Internet be around and will Alphabet be able to capitalize on the mediums used to access it?

From a numbers standpoint, Alphabet continues to crush it. In the last decade, revenue is up 600%, net income is up 431%, and its stock has handily outpaced the Standard & Poor's 500 5 to 1. In the last year alone, they’ve tacked on another $14 billion in retained earnings, building the cash pile to $71 billion.

Apple Inc.

Apple (NASDAQ:AAPL) owns the market for devices that power the way we interact with one another. It created the industry for smartphones and tablets as we know it today, and it generated a ton of cash the most of any company in history. Even without its chief innovator – Steve Jobs – the company has doubled in value. The iPhone, iPad, Mac and Watch are all major success stories. The subscription-based services and app store will continue to drive more and more profit.

Financially speaking, no other company has created as much total success in the last decade. The numbers look more like a startup than the most profitable company on Earth. Apple’s revenue is up 1,100% since 2006, net income is up 2,800%, and the stock has produced 841% for shareholders, beating Google 3 to 1.

Innovation

Amazing products and services will continue to be released by both of these companies in the future. Automotive innovation is something that will be interesting to see. The Internet of Things (IoT) is likely to be another trillion-dollar market which these two dominate in some way.

Of course, Alphabet’s mobile operating system Android is on a lot more devices than Apple, but Apple controls the entire ecosystem and continues to offer new products (like its Watch) and services (like Music) to consumers. Google’s Fiber service, coming soon to a town near you, could be a game changer or just a necessary evil to keep people using the search engine. The subscription-based services from both will continue to drive profit.

Both companies have an unusual problem: too much cash. Alphabet has $71 billion and Apple has $40 billion plus $50 billion in new cash a year. Neither company will be able to capture the same growth it had over the last decade and will be forced to put this cash to work to create further innovations – new ideas in areas about which consumers aren’t even thinking yet.

Stock growth

The best chance to see a trillion-dollar market capitalization lies with Apple for easy-to-understand reasons. For one, it generates a massive amount of income each year. In fact, in just a single year Apple generates what Google takes three years to produce. The possibility of multiple expansion regardless of macroeconomic circumstances is high.

Apple’s historic average price-to-earnings ratio is closer to 15; if it got up to what Google trades for (30x), it would be worth $1.5 trillion. At the same time, there’s a high probability Apple will earn $100 billion in a year at some point over the next five to 10 years. How long can the market truly discount its multiple?

Truth is we could have two trillion-dollar companies in the next 10 to 20 years, maybe three if Facebook (NASDAQ:FB) continues to ramp up. By the end of my life, trillion could be the new billion. I believe history will show that Apple and Alphabet got there first. The one caveat is if they simply use all the cash generated to buy back outstanding stock, thus increasing investors' ownership while (possibly) stifling market cap growth.

Whatever happens, the margin of safety is high on both stocks.

About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager and financial publisher that has helped investors produce market beating results since 2001. Today, I turn 40,000 hours of work analyzing and forecasting the world's leading investments into models for better business development.

Visit Jonathan Poland's Website


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