Cordial no more

For some time, previously good relations between AAPL and GOOG have been deteriorating, as each expands and reaches the fringes of the other’s core markets.  For example:

moves to date

–a couple of members of the boards of GOOG and AAPL have resigned from the latter’s director group, either because they felt awkward at having access to the trade secrets of both companies, or they were prompted by regulators to consider the potential conflict of interest more seriously than they had,

–GOOG has developed the Android operating system for smartphones, which it is supplying to competitors to the iPhone (which represents half AAPL’s profits).  It will soon launch the Google smartphone, which it is manufacturing and selling itself.

–GOOG is overseeing the manufacture of Android-based netbooks, which will debut in the second half of the year.  Though in a traditional laptop form factor, to my mind, they will compete against the iTouch and the iPad to a considerable degree.

–GOOG has also developed the linux-based Chrome operating system for PCs–which will drive its netbooks.  While this is aimed more directly at Windows, Chrome will also compete against AAPL’s Safari os.

the latest

AAPL has just announced that it intends to sell advertising on the iPhone that will appear in the apps that customers download.  The details, and a bunch of other AAPL stuff, are reported by Barron’s here.

who’s in better financial position for the upcoming conflict?

The answer is that they’re surprisingly evenly matched.  Here’s what I mean:

AAPL          GOOG

cash                     $24.8 bill     $24.5 bill

debt                        none              none

2010 earnings    $11 bill        $8 bill

2010 cash flow   $12 bill       $9.5 bill

growth over past 5 yrs

eps                         90%/yr        96%/yr

cash flow               73%             95%

investment implications

1.  In the early stages of any new market, participants generally ignore each and rush to stake out as much territory for themselves as possible.  The fact that former allies AAPL and GOOG are turning on one another implies they both perceive the best opportunities for growth now lie in taking market share from each other.  This means the market is maturing for both.

2.  Initial losers in this competition will be everybody else.  As the pace of the AAPL-GOOG rivalry picks up, so too will the pace of innovation.  Smaller rivals will likely be left behind in the dust.

3.  Expect slower growth rates from both GOOG and AAPL.

4.  The fact that both have huge financial resources and are of roughly equal size and earning power means there won’t be a clear winner for some time.

5.  No need to panic if you’re an AAPL or GOOG holder.  Year-to-date stock action suggests Wall Street has AAPL as a slight favorite over GOOG.  But the market is fickle.  And both stocks are trading at what I think are reasonably price earnings multiples–mid 20s–of anticipated 2010 earnings.  That’s not a high price for companies expected to be expanding at a 20%+ rate.

6.  Both stocks need to be monitored more carefully, though, to guard against the possibility that one or the other lands a knockout blow.