The Race to $5 Trillion: Who Will Get There First, Apple or Alphabet?
Key Points
Memory chip prices could represent a problem for Apple.
Alphabet is thriving from major AI demand.
Apple (NASDAQ: AAPL) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) have never ended the day in the $5 trillion market cap club. The only company to ever achieve that feat is Nvidia (NASDAQ: NVDA), and it's likely to stay there for good. But which one of these two will join Nvidia first?
Apple has a head start, with a $4.4 trillion market value versus Alphabet's $4.2 trillion (as of Aug. 12). But is that enough to hold off a rapidly rising challenger? Let's take a look.
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Apple's business could be facing a major headwind
Comparing these two giants is interesting, as one seems to have more problems emerging while the other is full steam ahead.
Alphabet is doing incredibly well as a business. Its core business is thriving, with Google Search revenue rising 17% year over year. Moreover, Alphabet's overall revenue increased by 24% in the quarter in large part due to its thriving cloud computing business, Google Cloud. In Q2, Google Cloud delivered 82% revenue growth, easily crushing expectations. With Alphabet making about $200 billion in data center capital expenditures this year, its elevated growth rate will likely persist for some time. With Alphabet's growth picture intact and AI computing demand off the charts, the growth could last for years.
Apple is in a different boat. Although it just posted some of its fastest growth rates in years, there is a major headwind brewing: memory chip prices.
AAPL Revenue (Quarterly YoY Growth) data by YCharts
Departing Chief Executive Officer Tim Cook warned investors that a major event, which he likened to a 100-year flood, is occurring with memory chip prices, and that it could meaningfully affect Apple's business. Apple really has two choices: raise prices or eat profits. If it raises prices, it may deter some consumers from buying the latest and greatest Apple devices. If it chooses to absorb the price increases, then its profitability could shrink.
Either one of those decisions isn't easy to make, and new CEO John Ternus will have his work cut out for him when he takes over in September.
Navigating a component crisis isn't what any new CEO wants to do, and it could be difficult for Apple's stock. As a result, I think Alphabet's business is better positioned to reach the $5 trillion mark first.
Furthermore, Apple also trades at a far higher premium than Alphabet, which inflates Apple's true size.
Apple trades at a premium to Alphabet
During Q2, Alphabet had a major gain on investment, so its earnings ratios are all messed up. Instead, we'll use operating cash flow to value each stock. From this perspective, Apple trades at a sizable premium to Alphabet.
GOOG Price to CFO Per Share (TTM) data by YCharts
In fact, if Alphabet traded at Apple's premium, it would be the largest company in the world by a fair margin, even surpassing Nvidia.
Apple has earned part of this premium through superior execution for years. Still, with rising headwinds from memory chip prices and a new CEO taking the reins, the market may not view Apple with the same level of confidence. As a result, I expect Alphabet to come from behind and reach the $5 trillion mark first.
Keithen Drury has positions in Alphabet and Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, and Nvidia. The Motley Fool has a disclosure policy.