Earlier this week, there was a noteworthy shift in the tech industry: Google parent company Alphabet Inc. (NASDAQ: GOOG) briefly surpassed Apple (NASDAQ: AAPL) as the most valuable company in the world.
The last time Google sat on this perch was back in February 2010, when both companies were worth less than $200 billion. Today, Apple and Alphabet stand at a virtual tie, each hovering at market caps of about half a trillion dollars.
To put things in perspective, back in 2010, Apple still had yet to release its first iPad. The newest iPhone on the market was the now-archaic 3GS, which sold a meager 1 million units during its life span. Desktop computers (Macs) were still the company’s most successful product line, accounting for about a third of the company’s revenue.
Clearly a lot has changed in very little time…
Over the next half decade, Apple Inc. would surpass Google to reign as the indisputable leader in not just the technology industry but the broader financial world.
Fueled almost entirely by the success of a single product, Apple rapidly became a powerhouse in the stock universe. By 2015, it was already earning more on an annual basis than any other company to have ever existed. Its cash horde also eclipsed $200 billion (another record) for the first time — more than the entire value of the company just five years prior.
Yet with all the success that Apple has had over the last half-decade, you’ll notice a glaring difference in how the market prices the company compared to Google. While the companies may be trading at similar capitalizations, on a pure earnings basis, the market is valuing Google at nearly three times what it values Apple.
In other words, for every dollar Google earns, Apple has to make three in order to satisfy the market….
So why the drastic difference in valuation? Why is Apple Inc., the most successful growth company in history, being valued at the same earnings ratio as the plateauing and long-established auto industry?
The answer is actually pretty simple: single product risk.
You see, as much of a windfall as the iPhone may have brought Apple over the last five years, the massive success of the device has become as much of curse for the firm as it was once a blessing.
The scary truth behind Apple’s flagship product is that Apple is its flagship product — we’re talking about a company that lives and breathes off a single device that will inevitably go out of style.
Even Apple’s less successful product lines — the iPad and the Apple Watch — are just reiterations of the iPhone with different names. There’s only so many times the company can resize the iPhone and pretend it’s something new.
Take away Apple’s branding, and virtually the entire company can be summed up like this: “Tiny iPhone. Little iPhone. Big iPhone. Really Big iPhone.” That’s not innovation… it’s replication, and it puts Apple shareholders at substantial risk.
Simply put, Apple has to actually evolve — or someone else will eventually take its place.
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So while the talking heads from Forbes, MarketWatch, and USA Today were all telling you Apple was a “bargain” at $130 last year, there’s a reason the stock is trading at just $96 today. Smart money has caught on to Apple’s single product problem — and they know the party could end at any moment.
As far out as that might seem to some, try to remember just how suddenly the iPhone rose to power… how quickly smartphones were able to decimate the PC industry once they reached commercial production.
It only took a few years for a single product to completely change the status quo of personal computing. If you don’t think that could happen again, I’m sorry to say you’re wrong.
The reality is that as incredible as smartphones are from a technological standpoint, the same thing could have once been said about the desktop PC. As successful as Apple has been, the same kind of false security was once felt about companies like Dell and HP (we all know where those firms stand today).
Until next time,
Jason Stutman
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