Technology stocks have ruled the last two decades. The major tech companies began the internet decade as start-ups and have grown to multi-trillion-dollar valuations. Over the last few years, the FAANG stocks have risen to prominence. The acronym FAANG stands for Facebook, Inc. (FB), Amazon.com, Inc. (AMZN), Apple Inc. (AAPL), Netflix, Inc. (NFLX), and Alphabet Inc’s Google (GOOGL). These companies have ascended to unprecedented market-cap heights on the back of their sound business models, strong earnings, and market dominance.
AAPL and GOOGL have performed exceptionally well over the past year. They have upgraded and expanded their offerings to meet changing consumer demand amid the pandemic and to facilitate the “new normal” way of living and working. Though many investors are now shifting away from expensive tech stocks to quality non-tech stocks that are expected to thrive with the economic recovery, the current wave of artificial intelligence (AI), 5G network, cloud computing and virtual reality products has the potential to be revolutionary in coming years and help the FAANG stocks keep advancing.
While the demand for AAPL’s next generation products and services over the years has been impressive, GOOGL has been at the forefront of shaping the future with its search services and cloud-based offerings. Both stocks have generated significant returns over the past 10 years. While AAPL returned 965.8% over this period, GOOGL has gained 777.7%. However, in terms of year-to-date performance, GOOGL is a clear winner with 33.7% returns versus AAPL’s negative returns.
But, let’s look closer to ascertain which of the two has better prospects for this year:
AAPL has been on an innovation spree across its product lineup lately. The early response to AAPL’s new products, led by the launch of the first 5G-enabled iPhone lineup last year, has been tremendously positive. On April 30, the company expanded its Find My ecosystem with the launch of AirTag, an iPhone accessory that provides a private and secure way to easily locate items that matter most to an individual. In addition, AAPL recently began taking orders for its new iMac and iPad Pro, which are both powered by its self-manufactured M1 chip, and for its next generation Apple TV 4K.
Mobile operator Vodafone Group and Google Cloud entered a six-year strategic partnership on Sunday to drive the use of reliable and secure data analytics, insights, and learning to support the introduction of new digital products and services for Vodafone customers worldwide through a platform called ’Nucleus.’ GOOGL also recently signed a multi-year, strategic partnership with Univision, the leading Spanish-language content and media company, to accelerate its growth across Univision’s portfolio and drive digital transformation.
Recent Financial Results
In its fiscal second quarter ended March 27, AAPL posted record revenue of $89.6 billion, up 54% year-over-year, with international sales accounting for 67% of its top-line. iPhones continued to bolster its net sales, generating $47.94 billion and rising 65.5% year-over-year. The remote work environment continues to influence sales of Mac computers and iPads. The segments reported a 70% and 78.7% increase in sales, respectively, compared to the prior year. Its EPS for the quarter came in at $1.40, up on $0.64 year-ago value.
GOOGL’s revenue in the first quarter, ended March 31, 2021, was $55.3 billion, representing a 32% increase versus the prior year. Google’s advertising segment (including Google Search, YouTube Ads and Google Network) contributed more than 80% to its top line, while its Cloud segment generated $4.05 million in revenue during the quarter. However, only the Google Services segment also generated operating income this quarter. Notably, GOOGL’s EPS for the quarter soared 166.4% year-over-year to $26.29.
Past and Expected Financial Performance
AAPL’s revenue and EPS grew at CAGRs of 9.6% and 19.8%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 21.9%.
Analysts expect AAPL’s revenue to increase 22.1% in the current quarter (ending June 30, 2021), 29.1% in the current year, and 4.1% next year. The company’s EPS is expected to grow 54.7% in the current quarter, 57.3% in the current year and 2.9% next year. Also, AAPL’s EPS is expected to grow at a rate of 17.9% per annum over the next five years.
In comparison, GOOGL’s revenue and EPS grew at CAGRs of 18.8% and 47%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 26.9%.
Analysts expect GOOGL’s revenue to increase 46.6% in the current quarter (ending June 30, 2021), 29.9% in the current year and 16.7% next year. The company’s EPS is expected to grow 91.3% in the current quarter, 50.5% in the current year and 7.8% next year. Its EPS is expected to grow at a 21% rate annually over the next five years.
AAPL’s trailing-12-month revenue is 1.65 times GOOGL’s. But GOOGL is the more profitable, with a 54.3% gross profit margin versus AAPL’s 39.9%.
However, AAPL’s 103.4% and 16.9% ROE and ROA, respectively, compare favorably with GOOGL’s 23.7% and 10.3%.
In terms of forward P/E, AAPL is currently trading at 25.66x, versus GOOGL’s 26.62x. In addition, AAPL is trading in line with GOOGL in terms of trailing-12-month price/cash flow (22.21x versus 22.25x).
However, in terms of trailing-12-month P/S, GOOGL’s 8.07x is 16.6% higher than AAPL’s 6.92x.
GOOGL has an A overall rating, which equates to a Strong Buy in our proprietary POWR Ratings system, while AAPL has an overall B rating, which represents a Buy. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Both AAPL and GOOGL have A Sentiment Grades, reflecting greater analyst confidence in their improving financials over the coming years. Both the stocks have a B Quality Grade, in line with their robust fundamentals.
In addition, both AAPL and GOOGL have a C Value Grade, consistent with their similar valuation ratios. However, while GOOGL is ranked #1 of 71 stocks in the Internet industry, AAPL is ranked #20 in the 49-stock Technology – Hardware industry.
Beyond what we’ve stated above, our POWR Ratings system has also rated both AAPL and GOOGL for Growth, Momentum, and Sentiment. Get all the AAPL ratings here. Also, click here to see the additional POWR Ratings for GOOGL.
The FAANG stocks have been among the best-performing stocks of the past few years and have proven unstoppable regarding innovation. Both tech giants have built strong brand value and achieved unprecedented operational scale and efficiency, spanning the globe.
However, it is also true that both AAPL and GOOGL are facing several legal and regulatory challenges in multiple regions. And investors must also acknowledge the fact that both companies possess solid fundamentals and sound financials to fight any potential antitrust challenges. Hence, both AAPL and GOOGL still have plenty of growth potential. However, GOOGL appears to be a better buy based on the factors discussed here.
GOOGL is considered to have a near-monopoly in online search and advertising. The company is regarded as a “Gatekeeper” of the internet due to its dominant market share in search, bolstered by it being the default search provider for many browsers. Moreover, Google X’s diverse bets that range from Waymo (driverless cars) to Verily and Calico (life sciences) to Deepmind (Artificial intelligence systems) also present immense growth opportunities for the company.
Notably, GOOGL is the best performing FAANG component so far this year. In contrast, AAPL is the second worst performing FAANG stock, just after NFLX. GOOGL is rapidly expanding its data centers to increase its presence in the cloud space to help companies leverage edge computing and 5G. The improving global economic health is enabling a robust recovery in its advertising business. Furthermore, its strong focus on AI and the home automation space should further aid growth over the long-term. Hence, we believe GOOGL will be a better performer in 2021.
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AAPL shares were trading at $127.66 per share on Tuesday afternoon, down $4.88 (-3.68%). Year-to-date, AAPL has declined -3.65%, versus a 11.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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