Google, or rather the new parent company called Alphabet, overtook Apple Inc. to become the world's most valuable corporation Tuesday. The two companies switched places after Alphabet jumped on its December quarterly earnings report, helped by a decline in Apple's shares.
GOOGL (Alphabet's ticker symbol) ended Tuesday's trading session at $780.91, a gain of $10.14 (+1.32 percent), on heavy volume of 6.3 million shares trading hands. Shares of AAPL ended the day at $94.48, down $1.95 (-2.02 percent), on light volume of 37.2 million shares trading hands. That left Alphabet's market cap at $537 billion, while Apple's market cap declined to just $523.9 billion.
This caps several months of gains for Alphabet and losses for Apple, as shown in this year-long chart for the two stocks:
AAPL in blue, with GOOGL in red
(Click for a larger image)
(Chart corrected to AAPL vs. GOOGL)
I've already seen some wailing and gnashing of teeth from Apple fans over this symbolic passing of the world's most valuable company title. Apple held it for almost four years, and just turned in a record December quarter. Why, oh why, does Wall Street hate Apple (go the comments)?
The reality is that there are some fundamental reasons Wall Street values Google a little more than it values AAPL, even though Apple makes more money than Google—by a lot.
The number one reason is growth. As of this writing, Wall Street can't see how Apple will grow. Investors have been worried about Apple's reliance on the iPhone for years, and even though Mac sales have been on the rise, those gains are effectively offset by declining iPad sales.
Apple fans believe the company will disrupt again (and again) in the future, but that belief is an article of faith until proven otherwise. Investors don't have that faith. Put another way, Apple's ability to keep its product plans mostly under wraps has a depressive effect on Apple's stock. Until Wall Street learns about a new product that can significantly boost Apple's revenues, investors aren't willing to bet money that will grow enough to justify a higher valuation.
This effect was multiplied when Apple turned in its own December results last week. Not only did Apple jut barely squeak out a record quarter, it warned that revenues and iPhone sales would be down year-over-year in the March quarter. There are good reasons for those declines, but no matter how you look at it, declines are not growth.
In a nutshell, that's why GOOGL enjoys a price-to-earnings (P/E) multiplier of 33.87, while Apple's P/E languishes at an anemic 10.05: Wall Street believes Alphabet can grow, while it doubts that Apple can do the same.
Perception and Size
There's more to Alphabet's valuation than that, and those other things are worth mentioning, too. Monday's earnings report was the first time investors were able to see Alphabet report its results as Alphabet, rather than Google. This means they were able to see each of Alphabet's subsidiary companies, something that was greatly obscured the way Google was structure before Alphabet.
While nothing has fundamentally changed in Google, investors appear to be thrilled to be able to see all the money Google loses in its moonshot categories when it can also see just how well Google's advertising business is doing. Advertising revenues were up 17 percent year-over-year.
Writing for The New York Times, Conner Dougherty put it brilliantly when he said:
Google began 2015 as a giant advertising company connected to a collection of intriguing science projects. Alphabet ended the year as a collection of intriguing science projects connected to a highly profitable advertising business.
And that was enough to send GOOGL up more than 1 percent.
Popular Science also noted that Alphabet's Google division now has seven products with a billion users. Each. Gmail, Android, Chrome, Maps, Search, YouTube, and the Google Play Store, each have a billion users.
That's a lot of people to carve up and sell to advertisers, and getting back to the growth point, Google shows no signs of slowing down. In addition, if just one of those moonshots at Alphabet (drones and cars and wearables, oh my!) works out, Google's growth would be through the roof.
I'm not saying Google is better than Apple. I still loathe being Google's product, and I favor Apple's products and business model in almost every conceivable way. But Alphabet being valued higher than Apple is perfectly rationale until Apple shows the world that it can still grow.
*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.