Google parent Alphabet Inc. is poised to become the world’s most valuable company, taking the crown away from Silicon Valley rival Apple after reporting higher profit and sales fueled by a booming advertising business that’s supporting ambitious new projects.
Alphabet’s shares jumped as much as 9.4% in extended trading, putting it on track to surpass Apple’s market capitalisation of $534.7 billion. The web company has been inching closer to the iPhone maker as investors lose confidence in Apple’s smartphone business and wager that Alphabet has a clearer path to growth. Apple first passed oil giant Exxon Mobil Corp. as the world’s most valuable company in 2011.
By changing its name and structure last year, Alphabet Chief Executive Officer Larry Page has put the focus on the company’s main web business while giving more insight into investments in new areas such as artificial intelligence, self-driving cars, health technology and fast Internet access. Even though Apple has also been building expertise in cars and AI, the secretive company has kept much of that under wraps. With iPhone sales slowing and China’s growth engine sputtering, Apple is on pace to post its first revenue decline in 15 years. Alphabet sales are estimated to climb 16% this year.
“Alphabet’s core business looks very healthy,” Josh Olson, an analyst at Edward Jones & Co., said. “That’s going to build investors’ confidence about the other bets they’ve been making.”
The shares of Mountain View, California-based Alphabet rose to $843 in extended trading from $770.77 at the close in New York, suggesting that the web company’s market capitalisation will exceed $550 billion when trading resumes on Tuesday.
Alphabet’s fourth-quarter revenue, excluding sales passed on to partners, rose 19% to $17.3 billion. That exceeded analysts’ average projection for $16.9 billion, according to data compiled by Bloomberg. Profit, before certain items, was $8.67 a share, beating the prediction for $8.08. The health of Google’s main business and investor confidence in the company’s ability to innovate has helped to more than double the stock price since 2012.
While Apple generates more than triple the revenue and profit of Google, investors focus more on future prospects than past performance. It’s a market truism that’s particularly acute in the technology industry, where new breakthroughs can rapidly undercut previously reliable business models. Apple and Alphabet’s ascendance to half-trillion-dollar-plus valuations illustrates the premium investors put on U.S. technology companies. Five of the nine most valuable companies in the world are from the industry — Alphabet, Apple, Microsoft, Facebook and Amazon.com.
Alphabet’s new ranking is also a milestone for co-founders Page and Sergey Brin, who started the company as students at Stanford University in 1998 as a tool to more easily search the Internet. The duo still controls the company through a preferred stock structure, are now among the richest people in the world.
Apple and Alphabet’s business models represent opposite approaches to selling technology tools and products. Apple releases a small number of premium-priced products that connect to a slate of services such as iTunes and the App Store, while Alphabet relies on its free services that bring in enough users to let it profit from selling a huge quantity of advertising. The two companies had a cooperative relationship for many years, and former Google CEO Eric Schmidt sat on Apple’s board. The alliance turned into a rivalry after Google released the smartphone software Android, which Apple co-founder Steve Jobs said copied Apple’s designs, leading to multibillion-dollar patent lawsuits around the world.
Now Page and Brin are spending more of their time making sure that Alphabet will be able to out-innovate rivals, while leaving the day-to-day running of its main business to Google CEO Sundar Pichai. Pichai has devoted resources to buffing up ad products, introducing new formats while improving the delivery and accuracy of targeted marketing spots. That helped to boost total clicks on ads by 31 percent in the latest period, even as the average price for an ads on Google’s websites fell 16%.
Still, Google’s newer divisions are expensive: Alphabet’s “Other Bets” category had an operating loss of $3.57 billion for 2015, while revenue — mainly from the Nest smart thermostat, Fiber fast-Internet access and health technology — was just $448 million. At the same time, overall expenses were kept under control, making up 36 percent of revenue, compared with 37 percent a year earlier. Fourth-quarter net income rose to $4.92 billion from $4.68 billion a year earlier.
Though Apple also has a large services business from iPhone and iPad owners tapping into the App Store, iCloud and Apple Music, investors haven’t yet been convinced that the business is enough to make up for slowing iPhone sales. Meanwhile, iPad sales have fallen for eight straight quarters, and Apple Watch sales remain modest.
For what it’s worth, neither Alphabet nor Apple will be in the running for world’s most valuable company by market value should Saudi Arabia decide to sell shares in the state-owned Saudi Aramco oil company. It’s estimated that enterprise could be worth in excess of $2.5 trillion if publicly held.
©2016 Bloomberg News