Sunday 18 March 2018

Could Alphabet take Apple's Number 1 spot?


Google's had a tough week in the UK. But its most hotly anticipated news is yet to come – the newly-formed Alphabet will report first results in its new avatar, on February 1.

The moment is a milestone in the company’s history, not least because it will report two sets of results – for Google Inc. and for “other bets” – for the very first time, making its manifold operations far more transparent. So far, Alphabet has confirmed the existence of nine subsidiaries, including life-extension research company Calico, early-stage investment vehicle Google Ventures and Google Inc., the search business we know and love. Now, along with the search giant’s core ad-targeting business, we may also find out how much money it’s sinking into its “moonshot” ideas, from Wi-Fi balloons, to smart thermostats and self-driving cars.

But there’s another milestone that the world is watching closely – the value of Alphabet versus Apple.

In 2013, Cupertino giant Apple surpassed Exxon Mobil to take the title of the world’s most valuable company. Since then, it has consistently beaten its own records, driven by its cash cow, the iPhone, posting its most recent profit of $18.4bn for the last quarter of 2015 – the biggest in corporate history.

To understand Apple’s complete dominance, all you need to look at is the iPhone. This week, Apple announced it had sold 74.7 million iPhones and made $51.6bn in revenue from those sales in the last three months of 2015. The iPhone accounts for over 60pc of all Apple revenue, and has remained popular at ever-increasing prices, in a world of plummeting smartphone prices. Although Apple didn’t disclose profit margins on iPhones alone, its gross margin was a hefty 40.1 pc last quarter.

But here’s the rub. Growth in iPhone sales, which was a record-breaking 46pc a year ago, was just 0.4pc in the most recent quarter. For the three months to the end of March, Apple predicted sales of between $50bn and $53bn (£35-37bn), a decrease of upto 16pc compared to last year. If this pans out, it will be the first decline since the first quarter of 2003.

The smartphone malaise is not just an Apple problem – data from IDC found that 2015 was the smartphone industry's lowest growth year, at under 10pc. In 2014, the growth rate was more than quadruple that, at roughly 40pc. Even in China, the world's biggest market, smartphone sales fell 4pc in August last year for the first time, according to market research firm Gartner.

The market, particularly in the west and in China, is approaching saturation. If you want to buy a replacement smartphone today, you are spoilt for choice. The hyper-crowded market has upstarts like OnePlus and Micromax vying for domination with Chinese stalwarts like Xiaomi and Huawei, and if the iPhone doesn’t entrench itself in growth markets like India, it could become an also-ran. In mature markets, high-end phone makers like Apple are finding that consumers seem content to use two-year-old models rather than pay hundreds of pounds for an incremental upgrade.

In fact, during the earnings call on Monday, Tim Cook revealed that 60pc of iPhone owners from before July 2014 have not upgraded to Apple’s newest models – the iPhone 6 onwards.

On Wednesday, Apple shares closed almost 7pc down, wiping more than $35bn off its market value.

Meanwhile, Alphabet has been having a gala year. It is expected to show at least 20pc revenue growth for the last quarter of 2015, compared to Apple’s 2pc, making it one of the most high growth technology companies, behind only Amazon and Netflix.

On Friday, Alphabet’s market cap rose above $500bn for the first time, and is currently about $30bn behind Apple’s. Emarketer analysts estimate that the mobile digital advertising market will climb to nearly $200 billion globally by 2019, with Alphabet taking a large slice of the pie. Roughly 55pc of global search ad revenue went to Alphabet in 2015, with the next largest company being Baidu at 8.8pc, according to Emarketer reports.

Last week, the Financial Times reported that Alphabet had already overtaken Apple as the world’s most valuable company on one specific metric – enterprise value. In other words, if you take away Apple’s pile of cash which amounts to $205bn, Alphabet was worth $424bn, compared to Apple’s $399bn.

Alphabet’s newly transparent results will almost definitely be good news for its profitability – the money sunk into blue-sky projects will be filtered out, meaning the health of advertising revenues won’t be marred. The Wall Street Journal estimated that the core business’s operating margin could rise about 3pc this quarter, all other things being equal.  Alphabet also has the long-term potential to develop entirely unique product lines, starting with the driverless car. A tie-up with a veteran carmaker like Ford, as was rumoured earlier this year, could propel it further upwards.

As of the writing of this piece, Alphabet’s market cap is $487.4bn, putting it within roughly 6pc of passing Apple. If Alphabet has a particularly strong showing next week, a new Number One isn’t totally out of the question.

Of course, this doesn’t account for Apple’s burgeoning product portfolio. While Alphabet relies on advertising for 90pc of revenue, Apple has already announced all-time record sales for Apple Watch and Apple TV, and the fact that 60pc of iPhone owners have two-year-old phones could mean September’s iPhone 7 will be the record-shattering upgrade phone. Rumours are rife about a March launch of a lower-priced iPhone 5SE that comes in the smaller size, but with iPhone 6S features like Live Photos.

And Apple may yet have a driverless car up its sleeve. It has already hired high-profile car experts including Megan McClain, a former Volkswagen engineer who specialises in automated driving, and Vinay Palakkode, a graduate researcher at robotics research leader Carnegie Mellon University. Reports have put a ship date as early as 2019.

The clash of the titans is reaching a crescendo, and it’s clear that Apple has Alphabet hot on its heels. We’ll be waiting to see if tech crowns a new king.

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