Apple Inc. and Alphabet Inc., Google’s parent company, have managed to make huge amounts of obscene amounts of money in any environment, pandemic or not. But the paths for the two tech giants may start to diverge later this year.
Both companies reported blowout figures Tuesday night that far exceeded Wall Street expectations. Apple posted adjusted earnings per share of $ 1.30, compared to an average analyst estimate of $ 1.01, resulting in a quarterly profit of $ 21.7 billion for the three months ended June. Likewise, Alphabet generated earnings per share of $ 27.26, ahead of the consensus of $ 19.35, while generating a net profit of $ 18.5 billion for its second quarter. Shares of Apple fell in after-hours trading, while shares of Alphabet rose.
There is a logic behind the reactions. No two tech giants are the same, and it all comes down to their business models.
Take Apple. Despite all the talk about its software and services businesses, the company’s foundation still rests on the iPhone. Despite strong sales results this quarter, investors are already thinking about how their next line of smartphones will perform. The problem is, there may be little reason to upgrade. Earlier this month, Bloomberg News reported that Apple plans to launch four models in September with minor feature enhancements and designs similar to last year. If true, it will be a huge disappointment compared to the current line of iPhone 12, which was Apple’s first with faster fifth-generation wireless capabilities.
And then there are the complications of the supply chain. For the second consecutive quarter, Apple executives said a shortage of components will affect their results. Uncertainty around next year may already be contributing to the underperformance of stocks this year.
On the other hand, Alphabet’s core business is more correlated to the overall economy than any particular product launch. Because most of your sources of profit come from your dominant search engine, you also have extensive exposure. That means that as reopenings continue in the coming quarters and the world returns to normal, Google’s advertising business should improve.
Beyond digital ads, Alphabet’s Google Cloud offering is also thriving, with revenue growing 54% in the June quarter from a year earlier. The unit has earned a reputation for its cutting-edge artificial intelligence tools and better integration with open source software technologies than its rivals. And while it’s smaller than Amazon Web Services and Microsoft Corp.’s Azure, it has clearly emerged as a viable third player.
Of course, both tech companies are under regulatory scrutiny. Governments around the world are investigating Apple’s App Store business practices, while Alphabet has been sued by the Justice Department and state attorneys general. However, these processes are likely to take time to reach resolution.
Meanwhile, investors are focusing on intermediate business fundamentals, indicating that Alphabet is on firmer ground relative to Apple. That seems to be a wise choice.