Google vs Apple
Posted on 31. Jul, 2011 by TheFreeInvestor in Investing Philosophy, Stock Analysis
Right from the IPO, I have been skeptical of Google’s (GOOG) business prospects. I thought it was an one trick pony. Of course, in hindsight, it hasn’t worked out for me as Google stock price has jumped multifold in these years and I missed out on that. Similarly, till recently, I was not a Apple (AAPL) stock owner either. But, I jumped in recently and have a full position of Apple stocks in my portfolio. So, in this post I will try to put down my thought process about these two great technology companies and their business models.
I recently finish reading the book In The Plex about Google. I highly recommend it. It chronicles birth and the life of Google all the way unto the end of 2010. After reading the book, my thought was – I love the Google of 2004, not so much in love with the Google of 2011. Knowing what we know now, it is easy to see why the high multiple of Google in past years were justified.
Both Google and Apple has grown from small companies to giants of technology industry primarily by innovation. But, it is important to understand the types of innovation in play at these companies. Google is a technology innovator driven by superior and disruptive engineering innovations. As I understand from the book, the Google culture is still very much like a small silicon valley start up where all new ideas, however unconventional, are welcome and encouraged. Though I love the idea that a large firm like Google can operate as a nimble start up, as a shareholder, I will be very stressed about not knowing the direction of the company and will find it difficult to find solace in the fact that they are throwing a lot of great ideas at the wall and see what sticks. I am not saying that it is a bad thing. But, it is not suited to my temperament as an investor.
On the other hand, Apple is an innovator of consumer products and uses technology as one of the enablers of satisfying consumer need. The other enabler of their product is the elegant industrial design of their products. Many technology watchers will attest that Apple products are not at the bleeding edge of technology innovation but rather at the forefront of usability, elegance and consistency of user experience etc. In last 10 years, they have been very successful in launching new products, sometime cannibalizing their exiting products, to ever increasing demand for Apple products. Though, just like Google, Apple too relies heavily on innovation, there is more “visibility” into their innovation than that of Google. I think, that’s the reason I am more comfortable investing in Apple rather than Google.
However, as a business, one key advantage of Google over Apple business model is that Google has a stream of near-guaranteed revenue and profit from its search business. As internet penetration continues to grow, they are likely to make more and more money from their dominance of search advertising business. On the other hand, Apple’s revenue is dependent on continuously innovating and selling more and more hardware and software from an ever increasing baseline of Apple’s revenue and profits. Apple doesn’t have an assured revenue stream like Google’s search business. Even with this limitation, I think, Apple has a lot of room to run as the Mac market share continues to increase.
In long run, it may turn out that Google’s democratized culture of innovation worked out better than the Steve Jobs led top down innovation at Apple. But, at this time, my money is on Apple because of their consumer focused innovative products combined with low current valuation of Apple stock.
(Disclosure: As of the publication of this post, I hold long position in AAPL. Please read the full disclaimer on the blog.)
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