Apple and Google: Going their separate ways

Apple and Google are currently the two biggest companies in the tech world. Apple, thanks to its revolutionary iPhone and iPad. Google, thanks to its Android OS and the Nexus S (and soon-to-come Chrome OS). So intense has the war between these two companies been that others have been laid by the wayside. Currently, Nokia is the only company capable of playing these companies at their own game. But even Nokia is incapable of fighting them in the US right now. Over the past three years, both these innovative companies have gained mindshare and market share in the US and the rest of the world.

How did it all start?

Apple shook up the mobile space in 2007 with the iPhone. So gob smacked were the other manufacturers with the device that many didn’t even think it possible to create such a device.

“Imagine their surprise when they disassembled an iPhone for the first time and found that the phone was battery with a tiny logic board strapped to it.” – Ex-RIM Employee

Even Nokia, for once, was caught unawares. It is rumored that Google started optimizing Android for touch only after the iPhone was revealed. Whether the rumor holds any water is inconsequential. What is important is that, about an year later, Google shook things up again with the G1 launch. It wasn’t as hyped as the iPhone, but the effects it had on the mobile industry are just as far-reaching.

The story today is that Apple is the third biggest smartphone manufacturer world-wide, and is set to overtake RIM t become second biggest. While it will never challenge Nokia simply because it doesn’t sell cheap phones, it has to be appreciated that Apple is doing this with simply one handset.

Google, on the other hand, has the world’s second most popular OS. It is the only OS that might challenge Symbian in the coming years. Some of the biggest handset manufacturers – Sony Ericsson, HTC, Motorola, Samsung, LG – have all grown fully or partially dependent on Android, and hence Google.

Understanding the impact

Apple today has the most desired smartphone in the world. All new touchscreen phones inevitably end up being compared with the iPhone, even if they are a lot cheaper. Apple also has the most desired handheld gaming consoles – iPhone and iPod Touch. Apple has established itself as a trendsetter. If Apple puts in a new feature in their phone next year, every handset manufacturer will try to follow suit.

Google has some of the biggest companies depending on it. It also has ambitions for its OS to gain the biggest market share, for only then will they be making any real profit from it.

Together, they define the kind of phones that are in the market. Not even Nokia has been brave enough recently to bring out any innovative form factor. Other handset manufacturers will follow the trend set by Apple and Google. If they decide to bring in the old candybar form, then all other manufacturers will follow suit (yes, yes, I know that won’t happen!).

It’s not just about form factor. It’s also about what’s inside. As soon as Android manufacturers started screaming their heads off about having 1 GHz processors, they suddenly became the standard. So what if the N8 runs so well on a 680 MHz processor? Android phones have a 1 GHz processor, so Nokia should follow suit. So what if those processors eat up the battery? You see, it’s not just about technology anymore. It’s about what Apple and Google decide to use – they set the standards.

Both have grown

This is what the build-up was all about: the growth of these companies. Trendsetters they might be, but that tag is useless unless they are benefitting from it.

How much have both these companies profited over the past few years as a result of their expansion?

Let’s look at Apple first. From revenues of $19.3b in the year ending 2006, they reached revenues of $65.2b in the year ending 2010. That’s a growth rate of about 340%. Profits were approximately $2b and $14b in these two years respectively. That amounts to a change of a whopping 600%.

Source

Google’s will announce its 2010 results in January. Its revenues from 2005 to 2009 went from $6b to $23.6b. That’s a change of approximately 290%. Similarly net income after taxes went from $1.4b to $6.5b (364%). (Source)

It is clear that both companies have grown significantly. It is no surprise the the stock price of both have gone up. The 5 year stock comparison graph belows shows as much:

Source

But hold on! Apple’s stock price has shot through the roof. Apple’s 10-k form shows that $100 invested in Apple in September 2005 would have netted the investor $529 five years later. That collaborates very well with the profit increase of 600%. But why doesn’t Google show the same growth rate?

More than technology

Of course, we shouldn’t be forgetting that Google isn’t just about mobile phones. If one needs any idea about the number of fields Google is in already, and how many more it plans to enter in the coming year, one need only take a look at its acquisitions in the past year. All in all, it made 40 acquisitions. It was on a shopping spree, to put it mildly. A lot of those acquisitions are listed on Wikipedia.

So Google’s share price isn’t determined solely by its performance in the mobile sector. Let’s also not forget that sales of mobile phones don’t net Google any money. It does not charge a licensing fee for Android, like the Symbian Foundation did for Symbian. All the money Google makes from Android are through sales in the Android Market and the ads displayed in certain services on the platform.

Stock price is also determined a lot from future expectations. Apple currently has few competitors doing what it is doing. The iPad still has no good enough competitor (no, the Galaxy Tab and Playbook are not good enough competitors). The iPhone still sells wildly and with huge profit margins. Mac’s share in the desktop/laptop market is on the rise. iPod is the only weak link in Apple’s armour at the moment. What Apple has managed to do is convince investors that its growth in terms of revenues and profits is set to continue for more than a few years. When investors are assured, they invest for the long term.

Google, on the other hand, still has given no clear indication of where it plans to go with its 40-odd acquisitions. Android has been the only hugely successful Google operation recently. Wave and Buzz, its attempts at foraying into the social media sector, were huge flops. Google TV has met a lackluster welcome. Chrome OS is likely to see a slow start, just like Android in its early days. In short, Google has failed to convince investors that it will see a steady growth in the coming years.

Is Google’s stock undervalued? Or is Apple’s overvalued? Only time will tell.