Featuring possibly the biggest product launches of the year, the Apple Inc. (AAPL) event, scheduled at 1 PM Eastern Time, will have investors and tech aficionados glued to their screens. New iPhone models, including the iPhone X, and other devices like a new Apple watch are likely to be released during its course.
Ahead of the event, a blog post from Qualcomm, Inc. QCOM has claimed that it was the first to usher in the most-recent cellphone innovations along with its Android platform partners. Given Qualcomm’s disputes with the iPhone maker, the timing of this announcement only serves to highlight the importance of the event.
It comes as no surprise then that several major technology names such as NVIDIA Corporation NVDA, which released new Mac compatible components in April, will be watching with bated breath. The success of these new Apple devices is likely to determine the performance of several of these companies to a considerable degree.
This is therefore as good a time as any to see how Apple stacks up against Alphabet Inc. GOOGL whose Android devices have captured an appreciably larger share of the smartphone market. With market capitalizations of $834 billion and $648 billion, respectively, these are the largest companies listed in the United States. Both stocks have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Shares of both Apple and Alphabet have been strong performers this year, easily outperforming the S&P 500’s gain of 11.1%. However, with an increase of 39.4% year to date, Apple has surged ahead of Alphabet which is only up 19% over the same period.
Here, we are utilizing the stocks’ Price to Earnings Growth (PEG) ratios in order to evaluate them from a valuation perspective. This is the most appropriate ratio since it takes into account the differences in growth witnessed among high growth tech stocks. Additionally, it takes into account the future earnings potential of companies.
Both Apple and Alphabet have lower PEG values than the S&P 500’s reading of 1.85. However, Apple is significantly undervalued, since its PEG of 1.33 is lower than Alphabet’s figure of 1.52.
Compared to other industries, tech companies have relatively higher gross margin levels. This is particularly true for those stocks which have higher brand value. The reason for such a phenomenon is possibly the lower volume of physical materials and smaller workforce required for such companies. At first glance, Apple does poorly on this count, since its gross margin TTM is 38.5% compared to the S&P 500’s level of 48.4%. Alphabet seems to excel when it comes to profitability, with a gross margin TTM of 60.2%.
But the picture changes completely if we undertake comparisons with their respective broader industries. Alphabet provides a significantly lower level of gross margin compared with the industry average of 70.7%.
Meanwhile, Apple’s gross margin is significantly better than the industry average of 37.2%.
Apple reported spectacular results for third-quarter fiscal 2017, driven by the impressive Service segment performance. Earnings of $1.67 per share and revenues of $45.4 billion surpassed the Zacks Consensus Estimate of $1.57 and $44.7 billion, respectively. On a year-over-year basis, earnings grew 17.6% and revenues increased 7.2%. (Read: Apple Q3 Earnings & Revenues Beat Estimates, Stock Up)
Coming to Alphabet, second-quarter diluted non-GAAP earnings of $8.90 exceeded the Zacks Consensus Estimate of $8.17. Also, earnings were up 15.1% sequentially and 27.1% year over year. Gross total revenue of $26 billion was up 5.1% sequentially and 21% year over year (up 23% in constant currency or CC). (Read: Alphabet Beats Earnings & Revenue Estimates in Q2)
Considering a more comprehensive earnings history, Alphabet has delivered positive surprises in three of the trailing four quarters. Apple is ahead on this count, having delivered positive surprises in all of the trailing four quarters. However, Amazon has a higher average surprise of 5.1%, compared to Apple’s reading of 3.8%. Also, the last earnings surprise for Alphabet was 5.6%, significantly higher than Apple’s level of 0.6%.
Estimate Revisions and ESP
Apple stands out when considering estimate revisions. The stock’s earnings estimate for the current year has improved by 1.2% over the last 60 days. In contrast, Alphabet’s earnings estimate has declined by 8.5% over the same period, making Apple the better choice on this front. Apple maintains its dominance on the Earnings ESP front with a reading of 2.7%, compared to Alphabet’s reading of -2.6%.
Our comparative analysis shows that Alphabet outperforms Apple when considering average earnings surprise and gross margins. However, the gross margin advantage fades on comparing Alphabet with its relevant broader industry. Ultimately, Apple holds an edge over Alphabet when considering price performance, PEG ratios, Earnings ESP as well as gross margin relative to its broader industry. This is why it may be better to bet on Apple over Alphabet as the landmark iPhone launch approaches.
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