Will Google Be Worth More Than Apple?

(Originally published here.)

When Google Inc. went public almost 10 years ago, the Economist magazine was skeptical that the Internet search company could hold its own against Yahoo! Inc. and Microsoft Corp. Now Google is the world’s second-most valuable company, and is gaining on Apple Inc.

One explanation: Google is paranoid about missing the next big thing, while Apple seems more focused on not messing up.

According to Bloomberg News, Google has been the most active corporate dealmaker during the past three years, investing in everything from military robots to home thermostats to peer-based lending. It has also been aggressive in funding startups through Google Ventures and buying stakes in more mature companies with the new Google Capital. The frenetic pace of spending might suggest disarray, but I’m more inclined to think Google is taking reasonable risks to protect its competitive position.

Companies get into trouble when they fail to adapt as the world changes. Think about Sony Corp., which should have been the biggest beneficiary of the revolution in consumer electronics but now barely survives. Or consider Eastman Kodak Co., which used to make a lot of money selling film only to see its market disappear with the rise of digital cameras. Even Microsoft, which still is one of the world’s most profitable companies, has missed plenty of opportunities over the past 10 years.

This is why it makes sense to use profits from mature business lines to fund bets on riskier ventures, even if the plans don’t always pan out. So far, Google seems to know how to minimize its losses from bad investments. It also has, as of last quarter, about $59 billion in cash and other short-term investments to play with, so it can afford to engage in a flurry of deals without putting much of a dent in its balance sheet.

Compare this with Apple, which has been remarkably conservative during the past few years, especially since the death of co-founder Steve Jobs. Nowadays it seems as if its managers have no ideas besides returning cash to shareholders. That’s a good strategy if you have no productive investments to make, but it doesn’t fill one with confidence that it can continue to lead in the hyper-competitive tech industry.

Apple is still incredibly successful — it now sells more computers than the entire PC industry — but its market share, margins and profits are all lower now than a year ago. The company’s stock market value has declined by about $180 billion since it peaked in September 2012. Over the same period, Google has gained about $160 billion. This reversal of fortune is striking in part because Google was worth as much or more than Apple until about four years ago.

Investors have preferred Google’s constructive paranoia to Apple’s excessive caution. The interesting question is to see which strategy gets vindicated in the long run.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.

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About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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