Judging by their stock charts, Wall Street has pretty much conceded the battle to AAPL. In fact, there isn’t much doubt at all. Since the ipo of GOOG in 2004, AAPL is up about 12x. GOOG is up 4x–and that includes a big jump after an unusual, and less than successful, ipo in which GOOG tried to market itself directly to investors, cutting out Wall Street investment banks.
Yes, the S&P is just about flat over that span, so both are big winners. And, yes, AAPL is starting from a low base in 2004, a point when some questioned its survival. But the big separation between the two names has come between the beginning of 2007 and now, a time period when AAPL tripled and GOOG has been flat.
AAPL has also pulled significantly ahead in simple balance sheet metrics like working capital or accumulated cash holdings. The balance sheet number read as follows:
cash $8.0 bill. $15.8 bill. $7.8 bill.
wc $8.3 bill. $17.9 bill. $9.6 bill.
cash $11.9 bill. $24.8 bill. $12.9 bill.
wc $9.4 bill. $20.2 bill. $10.8 bill.
At first glance, it looks like AAPL is pulling away from GOOG, but not opening up an insurmountable gap. But AAPL has recently begun to divide its marketable securities into those with a life of a year or less and those with more. The latter, $15 billion at 12/09, although cash-like, are listed as non-current assets. Adjusting the figures, AAPL’s cash is up by $27.9 billion over the past three years, or 3.5x the cash generation of GOOG. The main driver of this surge is the phenomenal success of the iPhone.
In addition, AAPL has set up a business, iAd, to sell iPhone ads through the apps downloaded from its store, a move calculated to fence GOOG out of the mobile ad business. Ironically, however, the FTC has citied iAd plus AOL’s purchase of mobile ad specialist Quattro Wireless as reasons of giving the anti-trust green light to GOOG’s proposed purchase of AdMob, a Quattro rival.
The are are other signs as well, that the contest may not be so one-sided from now on. According to the Financial Times, sales of smartphones using GOOG’s Android operating system were higher than those of the iPhone in the US market for the first three months of 2010, taking 26.6% of the market vs. 22.1% for AAPL. Android phones were about 10% of the worldwide market over the March quarter vs. 1.6% during the year-ago period. The gains come 40% from MSFT, the rest from everyone else.
Since the start of the year, GOOG has released version 2.1 of Android (Eclair), which increases the speed of phone apps significantly. This week it announced version 2.2 (Froyo), which gives the operating system another big overhaul. The following upgrade, Gingerbread, has a name and a potential release date of late this year, but no version number and few details.
Chrome os netbooks, at one time scheduled for release during the second half of this year, appear to have dropped off the radar screen. After the surprisingly strong sales of the iPad, they seem to have been replaced by a bevy of android-based tablets that are claimed to be hitting the market in time for the year-end holidays.
Suppose, then, that the next year or two show a reversal of trend, in which GOOG products gain market share over their AAPL counterparts?
Will this mean a significant increase in the growth rate of GOOG’s profits vs. what it is presently showing? Only time will tell, but my guess is that it won’t. Success of Android phones and Android tablets will allow GOOG to take its business into the mobile arena, but I think this will only erosion of revenue and profit expansion that Wall Street seems to now sense in the company. That’s probably worth a few points of price earnings multiple expansion, however.
On the other hand, GOOG success would also have the potential to stop the momentum of the AAPL earnings freight train that is currently barreling down the tracks at an extraordinarily rapid clip. As is the case with any growth stock, a slowing in growth from the pace the market expects has two negative effects on the stock. It lowers the stock price by the extent to which earnings fall short of Wall Street expectations. And it causes the price earnings multiple to contract. This happens both as investors project forward a new, lower rate of profit advance, and as the open-ended “dream” that the stock will always surprise on the upside becomes tarnished.
For me, this means that, as stocks, AAPL has much more to lose than GOOG has to gain from Android success.
Tis is a situation to monitor closely.