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Better Buy: Apple vs. Alphabet

Several tech stocks have fallen over the past few months as higher interest rates and other macroeconomic headwinds dragged a pullback toward more conservative investments. However, a handful of resilient blue-chip tech stocks have weathered these sell-offs much better than speculative growth.

Two of the most flexible names were apple (AAPL 4.08%) And the the alphabet (The Google 4.16%) (Google website 4.20%). Both stocks are down about 20% this year but have outperformed NasdaqYear-to-date decline by about 30%. Nor have they been crushed like hyper-growth tech stocks.

Should investors buy Apple or Alphabet stock now? Let’s take stock of their core business, near-term challenges, and assessments for decision making.

The person is washing with money.

Image source: Getty Images.

Differences between Apple and Alphabet

Apple and Alphabet are often mentioned at the same time, but they operate in completely different business models.

Apple is one of the best smartphone makers in the world, and its line of devices also consists of iPads, Macs, Apple Watch, AirPods, HomePods and other devices. The sprawling ecosystem of software and services — which includes Apple Music, Apple TV +, Apple Arcade and other paid services — closed 825 million paid subscriptions in the second quarter of 2022.

During the quarter, Apple generated 52% of its revenue from iPhones, 11% from Macs, 8% from iPads, and 9% from other devices and accessories. The remaining 20% ​​came from the services sector.

Alphabet’s Google owns the world’s largest Internet search engine, the most used mobile operating system (Android), the streaming video platform (YouTube), the leading web browser (Chrome), and the most popular email service (Gmail). It also owns Google Cloud, the third largest cloud infrastructure platform in the world.

Alphabet generated 80% of its revenue from Google Ads business in its most recent quarter. Another 10% came from Google’s non-advertising businesses (including subscriptions and device sales), and 9% came from Google Cloud. The remaining sliver came mainly from Alphabet’s “other” experimental work – which includes autonomous driving and life sciences branches.

Both companies still face macroeconomic challenges

Apple and Alphabet both make solid profits and make a lot of money, so they are better insulated from higher interest rates than unprofitable companies with negative cash flows. However, neither company is completely immune to other macroeconomic headwinds.

Apple still generates most of its revenue from hardware sales, and its shipments have been throttled by supply chain restrictions in recent quarters. It also expects its sales in the Greater China region, which accounted for 19% of its revenue last quarter, to be disrupted by the recent COVID-19 shutdowns.

With the growth of Apple devices slowing, it is likely to ramp up its spending to develop new subscription services and devices. This pressure is likely to reduce profit margins in the near term and profit growth.

Apple’s revenue and profit grew 33% and 71% respectively in fiscal 2021 (which ended last September) as it launched its first family of 5G devices. But in fiscal 2022, analysts expect its revenue and profit to grow just 8% and 10%, respectively, as it navigates those tough comparisons and grapples with ongoing supply chain challenges and COVID-19.

Google’s core advertising business typically thrives during times of economic growth but struggles during recessions. It suffered a slowdown in the first half of 2020 as the pandemic spread, but Google Cloud’s growth throughout the early days of the crisis cushioned that blow.

Its advertising business recovered in the second half of 2020, and Google Cloud continued to expand. This momentum continued throughout 2021, but YouTube’s unexpected slowdown (to 14% annual growth) in the first quarter of 2022 spooked investors last month. And its commitment to ramping up its investments, even as its advertising business faces unpredictable headwinds this year, has also worried investors.

Alphabet’s revenue and profit rose 41% and 91%, respectively, in 2021 as it faced easy comparisons to the first half of 2020. But this year, analysts expect Alphabet’s revenue to grow only 16% with its earnings falling 1%.

Ratings and judgment

Apple trades at 24 times forward earnings, while Alphabet has a forward P/E ratio of 20. Apple pays 0.6% forward yield, but Alphabet pays no dividends.

I own both of these stocks, and I think they are reasonably rated at the moment. But if I had to buy more shares in one of these stocks, I’d choose Alphabet for these simple reasons: its advertising business isn’t as cyclical as Apple’s hardware business, it’s not as heavily exposed to supply chain challenges, it has limited exposure to China, and its inventory is a bit cheaper.