united kingdomen
Google takes a bite out of Apple

Google takes a bite out of Apple

04-02-2016 | Insight

‘The king is dead. Long live the king!’ After years of being the company with the highest market value, Apple has been successfully dethroned by Google. Or rather, by Alphabet – as the company has officially been called since 2015.

  • Jack  Neele
    Jack
    Neele
    Portfolio Manager

Speed read

  • Google replaces Apple as world’s biggest company
  • Tech companies now hold top 4 market cap positions
  • Google and Facebook have more tailwinds than Apple
Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

With a market cap of USD 531 billion, the artist formerly known as Google is now officially the world’s biggest company – despite the difference with Apple (USD 524 billion) being little more than one percent.

What is striking is that positions three and four are also held by technology companies: Microsoft (USD 420 billion) and Facebook (USD 326 billion). This means that tech companies now overwhelmingly dominate the market and that the time when companies like ExxonMobil and General Electric could call themselves the world’s largest appear to be well and truly over. These old industries have been relegated to second place by the technology sector.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Keys to success

What is the driving force behind this sector’s success and how sustainable is that success? Jack Neele, portfolio manager of Global Consumer Trends Equities, doesn’t see an end to this shift in tectonic plates yet. “Thanks to the rise of the internet, these companies have the advantage that they can operate worldwide very easily. Their strength also lies in the fact that they offer a platform that brings together supply and demand and that other companies are unable to circumvent.”

If you want to market a product, you can’t do without the Amazon web service. To generate brand recognition, you need Google Keywords. And Facebook advertising is a must. “Customers are online almost 24/7, so that’s where you have to meet them. Even in the current difficult market conditions, these companies are managing to accelerate their profits. This says something about their relative strength,” says Neele. “What’s more, Google and Facebook will have virtually no competition in the near future.”

And companies that do have the potential to develop into competitors are being bought up. By acquiring Instagram and WhatsApp for example, Facebook not only added more strings to its bow but also ensured that these companies can’t become a thorn in its side further down the road.

Internet is the be-all and end-all

When it comes to global roll-outs via the internet and offering an indispensable platform, Apple fails to measure up (the AppStore is a platform created for app developers, but services account for only 8% of its sales) and this is part of the reason for the changing of the guard. While Google and Facebook benefit from increasing internet use and the rapidly growing market for online advertisements, with increasing prices, Apple has to sell even more iPhones each year. Analysts expect this growth to flatten out this year and are even forecasting the first negative growth in the coming quarter.

“The high levels of smartphone penetration worldwide – only in a handful of emerging countries do you still see reasonable growth– will make it harder and harder to achieve growth,” says Neele. It’s just a matter of waiting for even more new products, like the iPhone 7, which could perhaps move the share price in the right direction again. “The iPhone 6 and 6S were a really huge success though, with its bigger screen taking the wind out of rival Samsung’s sails. But that success is petering out now. The holiday season is behind us too, which doesn’t help sales figures either.”

Apple’s biggest challenge is the flipside of its own success. Or as Neele puts it: “the law of the large numbers.” If you sell over 200 million iPhones a year, it’s difficult to keep boosting that number by 20% year in, year out. “The market favors Google and Facebook’s more at the moment. It’s simply easier for Google to tweak its search algorithm than for Apple to develop a new iPhone.”

No dark clouds on the horizon

This is reflected in the companies’ valuations – and with a P/E ratio of 10, Apple is considerably cheaper than Google (22) and Facebook (36). It’s not the first time that the law of large numbers has given rise to a new name like ‘largest company in the world’. Microsoft and Cisco have previously faced growth slowdowns after achieving a market cap of over USD 500 billion.

The shift in activities to the internet, the continued increase in internet penetration and the fact that Google manages to get involved in everything seem to indicate that the company will be able to continue its growth for a few years yet, as is also evidenced by the analyst estimates of 17% earnings growth for the next two years.

So, are there absolutely no dark clouds on the horizon? Amazon, Facebook and Google may also be faced with the Apple problem eventually. After all, 20% growth can’t be achieved ad infinitum.

Subjects related to this article are:

Disclaimer

Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.

In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.

In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

I Disagree