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Alphabet At $2 Trillion: Better Pick Than Apple Stock?

As Alphabet joins the $2 trillion club, the Apple Maven asks: is GOOG a better pick than AAPL? Here is how to think through this question.

On November 8, Alphabet stock  (GOOG) - Get Alphabet Inc. Class C Report reached the $2 trillion valuation during the trading session. This is only the third time that a US-based company achieves this feat – the other two are also part of the FAAMG Big Tech group.

Figure 1: Apple and Google logo.

Figure 1: Apple and Google logo.

Today, I look at the pros and cons of owning Alphabet instead of Apple stock  (AAPL) - Get Apple Inc. (AAPL) Report. The latter, valued at just short of $2.5 trillion, has recently lost the crown of most valuable company in the world to Redmond-based Microsoft  (MSFT) - Get Microsoft Corporation (MSFT) Report.

(Read more from the Apple Maven: Apple Stock: Here Is The Path To All-Time Highs)

A 2021 darling

Alphabet stock has been the winner among its Big Tech peers in 2021. The chart below shows that shares have performed much better than any of the other five FAAMG names YTD, after a year of underperformance in 2020.

To be fair, Alphabet has been executing beautifully in 2021. Since February 2, when the company reported fourth quarter 2020 results, Alphabet delivered four back-to-back, all-around beats. The Q1 EPS beat of almost $11 per share was the widest in the past five years at least, and so was the Q2 revenue beat of nearly $6 billion.

Figure 2: FAAMG dividend adjusted return.

Figure 2: FAAMG dividend adjusted return.

But beyond execution, Alphabet has also been a beneficiary of a return-to-normal global economy, following the worst of the pandemic. The tech giant’s business model is primarily ad-based, and many businesses (especially those that rely on consumers spending their money outside the home) did not have the incentive to invest in promotion during the lockdowns. Things have now started to change.

The numbers help to illustrate the robust performance of late. In the most recent period, Alphabet delivered YOY revenue growth of 41%, following 62% reported in the prior quarter. In 2020, the largest top-line growth that Alphabet managed to offer was 24% in Q4, two quarters after reporting a very rare revenue contraction in Q2.

AAPL vs. GOOG: valuation and momentum

Back to the question proposed at the beginning of this article: is GOOG a better two-trillion stock pick than AAPL? I believe that two factors need to be considered when answering this question.

First, Apple and Alphabet are going through two distinct moments. As I mentioned recently, Apple bears seem concerned that the company will be negatively impacted by a drop off in pandemic support. The thesis is that consumers rushed to buy new tech devices and services during the COVID-19 crisis, and that now they are ready to shift their wallet share to other types of purchases.

Apple’s loss, in this case, should be Alphabet’s gain. Therefore, I believe that picking GOOG over AAPL implies a preference for the return-to-normal trade.

But here’s where the second factor comes into play. Once upon a time, in the first quarter of 2021, GOOG was valued at a trailing earnings multiple of 28 times – see chart below. The stock could be considered a GARP (growth at reasonable price) play at that point. Today, shares trade for a much richer 38 times. For comparison, Apple’s P/E has dropped from 34 times in January 2021 to 26 times now.

Figure 3: GOOG's historical P/E.

Figure 3: GOOG's historical P/E.

So, I could argue that Alphabet has better short-term (say, six- to twelve-month) prospects that Apple. However, might GOOG be already priced richly enough to reflect this reality? And what will happen to the stock in 2022, when the company starts to face very tough comps – just like Apple has been in 2021?

The Apple Maven’s take

I believe that Alphabet is a phenomenal company, and that mega-cap tech investors should not ignore it as a long-term, buy-and-hold investment opportunity. That said, much of the near-term upside in GOOG may have already been captured by the stock’s 70% climb in 2021.

Therefore, I would not necessarily consider GOOG a better two-trillion-dollar pick than AAPL today. This train may have already left the station, leaving behind investors that failed to take advantage of the buy opportunity some 12 months ago.

Twitter speaks

Alphabet has just joined the $2 trillion club alongside Apple and Microsoft. Of these three stocks, which would you rather buy now and hold for the next 12 months?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)