A Blog by Jonathan Low


May 27, 2013

That Vision Thing: Google Poised to Surpass Apple in Value

Google's glasses have captured the world's imagination and have come to symbolize the once forgotten company's resurgence as a tech leader.

But it is the broader definition of vision that best captures the rationale for why investors have seemingly abandoned Apple and embraced Google.

It is important, first, to remember that the traditional notion of an 'investor' sitting at a desk and calculating which stocks or bonds to buy is hopelessly outdated. That investor is now likely to be an algorithm employed by a very powerful bank of computers which may trade tens of thousands of shares in milliseconds in order captures fractional increases or decreases in value. So much for the green eye-shade and the so-called story stock.

But the people who design those algorithms are looking for evidence of future value being created. And in that sense, Google has been generating lots of new concepts that are both achievable, scalable and strategic. Apple, by contrast, is still talking about its phantom TV and the latest iteration of its iPhone, a concept expanding in neither growth nor charm. In fact, it's getting boring. And especially when one looks at how the Samsung-Google Android partnership is gaining share.

The issue is not just a marketing or public relations problem. Strategists have often advised companies that are outgrowing their market to redefine the market. Google is doing that. After a period in which its brand was synonymous with innovation, Apple continues to mine what has worked for it recently.

Apple is in no danger of running out of innovative ideas, or profits. But while Google speaks about Google Fiber or Google Wallet or Google Glass, Apple is associated with stories about tax dodges and slavish working conditions. When you are trying to convince investors and customers that you represent the future, only one of those stories sells. And it isnt Apple's. JL

Rolfe Winkler reports in the Wall Street Journal:

Six months ago, Apple had a market value of about $550 billion; Google, around $230 billion. Since then, as Google shares have risen by a third and Apple's have dropped by a quarter, the gap has shrunk to about $100 billion. Before long, Google may end up as the most valuable tech company. Adjusting for cash, the companies are already neck-and-neck.
Tech investors should take a page from the geeks and pay close attention to developer conferences. Watching Google it is easier to understand the great rotation into the search giant's stock.
What was on display at Google's confab for coders helps explain why: Its success boils down to innovation, building leading software and services for users and giving away most of it.
Take Android. Google now says over 900 million Android devices have been activated, versus over 400 million as of last June. That stunning growth is thanks to Google giving away the software. Plus, it powers devices with wholesale prices ranging from $600 down to $40, estimates Strategy Analytics.
Low-end pricing is vital. It means Android appeals to more consumers than higher-priced iPhones. Consequently, Android had smartphone-market share of 73% in the year through March, compared with the iPhone's 18%, Strategy Analytics says.
Market share acts like gravity in computing: Dominant operating systems pull software developers into their orbit. Years ago, Microsoft MSFT +0.35%licensed its Windows operating system to multiple manufacturers, achieving dominant share. Computer buyers soon found software programs typically were compatible with Windows, but not Macs.
While Google doesn't profit from Android directly, most Android devices deliver services that do make Google money: search, YouTube, and maps, for instance. It also helps Google capture data it can use to "personalize" services, and advertising, for users.
Indeed, Google has established itself as a leading developer of mobile software. Add Gmail and, in the U.S., Google has more apps among the top 15 in terms of user engagement than any other developer, according to comScore.
Nothing revolutionary emerged at the developer conference. Nevertheless, Google delivered nifty upgrades to keep its services ahead of rivals'. Improvements to voice-search capabilities, combined with its huge data stores, make it possible to imagine conversing with a computer. Google is also packing more reviews, images and data points into its Maps app.

Even where Google lags behind, it is innovating. A new music-subscription app it announced combines features of both Spotify and Pandora. Its social network, Google+, still trails far behind Facebook FB -2.98%by number of users, but upgrades put it ahead in features like video-chatting and its news feed. And after aping the iPhone and iPad to get its foothold in mobile, Google is developing its own, potentially revolutionary hardware design with Google Glass.
One challenge: Google doesn't completely control its mobile future. Hardware makers and others can modify Android for their own services. Amazon.com, AMZN -0.02%Samsung and Facebook all do this. But that is a price worth paying since Android's ubiquity will still encourage software development.
Apple wants its iPhone and iPad to avoid the Mac's fate. It hopes to grab back market share by offering cheaper versions. Luckily, Apple's big head start in mobile means there is no shortage of software for its mobile operating system, iOS.
Apple has another redeeming feature for investors: a much cheaper valuation. Net of cash, Apple and Google trade at seven times and 19 times forecast 2013 earnings, respectively. Google's momentum strikes the fancy of growth investors, who could drive the shares higher, but Apple's battered shares offer tempting value.
Apple's software is in need of an overhaul, having grown stale. It can also help its cause by investing in software and services for its devices.
So investors ought to pay close attention to Apple's developer conference in June. Advances there are likely more important to its future than the next iPhone launch.


Post a Comment