Why did Google become more valuable than Apple. What happened in the last six months?
It’s a good question.
Most analysts and frenzied articles on the subject make very basic mistake that is both common and easy to do: they confuse a companies stock performance with company performance and assume that a company is fairly valued.
While stock performance can sometimes follow a company’s actual performance, stock price is based on how well investors think the company will do, not how well it’s actually going to do and they are more wrong than they are right.
There are two ways to determine how to price a stock and that is future earnings and past performance. The narrative right now is that Apple is done growing and their past performance is not an indicator of future performance. That’s a valid point, but I think invalid. I fail to see how a company with strong growth that even at maximum growth is still much smaller than a company with steady earnings and little growth is worth more, but I’m not a Wall Street analyst either.
So let’s look at future growth, since that is what they are basing this on.
I go in-depth into Apple’s future prospects in Michael Vogel’s answer to Is Apple at peak earnings? As I stated there, Apple has a lot of growth left in them. The market doesn’t see it that way. However, the market’s track record on Apple is pretty terrible. In 2012, the same thing happened. Apple had no growth left in them, according to Wall Street, and they were going to be sunk by Samsung and Google, especially if they didn’t introduce both a cheaper and larger phone right away. Their stock sank and then the company continued it’s explosive growth, completely surprising the market. To look at Apple in late 2012 was to see a company on it’s way out, not a company that is more than 3 times as valuable. Incidentally, this was also the last time Apple lost the top spot. Whether I’m right or wrong about growth, Apple still huge and has many times the earning potential as Google.
Google/Alphabet is a valuable company and they are working to shore up their biggest weakness: that they are a single product company sitting on top of an ad empire that may crumble at any time (Bad Ads: Research Shows They May Cost More Than They’re Worth) They are diversifying and preparing for that day and Wall Street has responded to it. Are they worth their price? I think they actually are. They may seem a little overvalued at this point, but overall, I think Google has shown that they are innovative enough to move past ads and build a strong, diversified company. Their move to change the name and separate their different sections shows that they are serious about this. I think Google is fairly valued with strong growth in the future.
So the bottom line is that if Google, the question remains is Apple undervalued. I would say that yes, they are. Their fundamentals are strong and investors are seriously underestimating their growth potential and the market in general. Bottom line is, investors are give more leeway to software and services companies than they do hardware companies, rightfully so. Apple is generally the exception to this, but they still get burned by it. I expect to see a repeat of the 2012-2014 with Apple in terms of stock performance. We’ll see a major dip and then they’ll come back from it strong.
Short answer, Wall Street doesn’t understand Apple and punishes their stock for it.