They are absolute of the most effective companies that the arena has ever recognized. One is the maker of the iPhone, the unique cellphone — the device that essentially modified the manner we interact with every other. The different has taken all the world’s information and put it at our fingertips.

I’m speaking, of course, approximately Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG)(NASDAQ: GOOGL), regularly known through the name of its largest subsidiary: Google. Investors in both corporations have experienced full-size profits during the last 15 years. But that’s the higher stock to shop for nowadays?

I might not fake I can tell you the solution to this question with 100% certainty. I can not. And neither can everybody else.

But we will evaluate these two on 3 distinct continua and see which comes out beforehand.

Financial Fortitude
I’m a protracted-time period investor. When I purchase a stock, I’m considering wherein it could be when I retire…30 years from now. So I’ve everyday the reality that I’ll endure more than my honest proportion of market swoons and economic recessions.

What I need to know is whether or not the agencies I personal can truly advantage from such difficult instances. How can that be? Well, companies flush with coins can repurchase their personal shares whilst they may be on sale, or collect opponents at a discount — or genuinely provide up deals the competition can not in shape, using them into financial ruin. Whatever direction such corporations take, they emerge from a downturn more potent due to it.

Keep in thoughts that Alphabet and Apple are more or less the equal length, in terms of market capitalization:

Company Cash Debt Free Cash Flow
Apple $245 billion $93 billion $62 billion
Alphabet $119 billion $4 billion $23 billion

DATA SOURCE: YAHOO! FINANCE. CASH INCLUDES LONG- AND SHORT-TERM INVESTMENTS. FREE CASH FLOW PRESENTED ON TRAILING-12-MONTH BASIS.

Technically speaking, Apple comes out ahead. It has a larger net cash position (cash minus debt), and stronger free cash flow. At the same time, the entire point of this exercise is to gauge whether either company would fare better than the other in a downturn.

Because these are both such strong balance sheets, with such strong free cash flow, I’m willing to call this a tie. Both companies could benefit enormously from an economic downturn. I do actually believe Alphabet would fare better, as Apple’s revenue relies on highly discretionary and expensive purchases of iPhones (more on that below).

Valuation

Next, we have a valuation, which is a fancy way of saying we want to figure out which stock is “cheaper” than the other. And for beginning investors, a stock’s price is not an accurate reflection of whether it’s cheap.

Rather, measuring a stock’s price relative to other metrics — like its earnings (P/E), free cash flow (P/FCF), or potential for growth (PEG ratio) — gives us a better picture of what we’re paying for. Here’s how these two stacks up in terms of their price tags:

Company P/E P/FCF PEG Ratio Dividend Yield FCF Payout Ratio
Apple 14 13 1.0 1.8% 23%
Alphabet 28 34 1.6 N/A N/A

DATA SOURCES: YAHOO! FINANCE, E*TRADE. P/E = PRICE TO EARNINGS, P/FCF = PRICE TO FREE CASH FLOW, PEG = PRICE/EARNINGS TO GROWTH. P/E PRESENTED USING NON-GAAP (GENERALLY ACCEPTED ACCOUNTING PRINCIPLES) FIGURES WHEN APPLICABLE. N/A = NOT APPLICABLE, AS NO DIVIDEND IS OFFERED.

Here we have a much clearer winner. Apple isn’t only inexpensive on the basis of profits and unfastened cash flow, but also cheaper relative to its growth potentialities. And as a cherry on a pinnacle, it even offers a dividend. Because much less than one-zone of free cash float is used on the dividend, it both may be very secure and has plenty of room for increase.

Sustainable competitive advantages
Finally, we have far and away the most crucial — and tough — aspect to the degree: sustainable competitive blessings — or “moats,” as they may be noted in investing circles. Moats are the forces that maintain businesses on a pinnacle of the arena for decades, whilst the competition tries futilely to seize enterprise away.

In standard, there are 4 distinctive moats groups may have:

Low-price production: When one enterprise gives up something of identical or higher exceptional for a consistently decrease fee, it is going to be the lengthy-term winner.
High switching prices: Some groups lock customers in via making it painfully tough to exchange away to another provider.
Network outcomes: With each additional user of a service (or product), that service (or product) becomes incrementally more valuable.
Intangible belongings: This includes such things as logo loyalty, patents, and regulatory protection.
Let’s start with Apple. The organization’s largest moat comes through its logo power. While iPhones and iMacs can be incrementally higher than the competition, clients are willing to pay a miles higher premium than might be warranted to have that silver Apple emblem on their device. Forbes back up that principle, assigning Apple the highest brand fee within the world — with a well worth estimated at $183 billion.

But this is not all; Apple has also been maintaining customers round thru high switching prices. Think about it: If you’ve got an iPhone, an iMac or MacBook, and/or an iPad, and you have them all synced with all your documents uploaded to the iCloud — it would be a royal ache in the rear to exchange.

While buying an Android smartphone, for instance, can also make the experience in isolation, the equation adjustments while you take into account all you would be giving as much as do so. This enables explain why many buyers are so excited via Apple’s booming services revenue — it’s emblematic of a developing moat of excessive switching costs.

Alphabet, however, has its personal solid of moats. While not quite as sturdy as Apple’s, the employer additionally has a completely high brand fee. Forbes estimates that Google is the second one most precious emblem in the international, worth $132 billion.

The agency also advantages from the same high switching expenses as Apple — though, over again, at a smaller scale. If all of the images you take to your Android telephone, and all the files out of your Chromebook, are robotically uploaded for your Google Drive — and you have those gadgets synced — you would be less probably to buy an Apple tool.

But Google’s real coup comes in the form of low-price production. “Production of what?” you may ask. Data — massive, considerable, immense gobs of statistics. Google has 8 unique services with over a billion customers each: Search, Maps, GMail, Google Play Store, Google Drive, Chrome, Android, and YouTube.

Most of those products are unfastened to apply, and that’s fine with Google. The company can collect your information, turn around, and promote it to advertisers for the form of laser-centered commercials nobody else (apart from Facebook) ought to probably provide. At the cease of the day, it’s crucial to understand that Google — and as a result, Alphabet — is essentially an advertising and marketing business enterprise. Over 85% of the Alphabet’s revenue comes from advertising.

Believe it or not, there’s one greater vital moat worth mentioning: YouTube, the sector’s second-maximum popular web site at the back of Google itself, advantages from the network impact. People who make films understand that others will see them on YouTube. That attracts even extra users — and therefore greater producers. It’s a virtuous cycle.

While Apple’s moat has confirmed plenty stronger than I once an idea, I believe that Alphabet’s is superior over the long term.

Winner = Alphabet.

My winner is…
So there you’ve got it. When those two titans move head-to-head, it is a tie. Whenever it truly is the case, I constantly provide the brink to the agency with the widest moat — in this case, Alphabet. My own private portfolio backs this conviction: Alphabet makes up over 10% of my circle of relatives’ actual-life holdings.

While I actually have incredible appreciate for Apple and for what Steve Jobs and Tim Cook and their teams have done, I assume it’s a great deal higher to spend money on offerings (Alphabet) over hardware (Apple). While an investment in either has established to be an awesome circulate, I believe Alphabet is a better long-term play.

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