When it comes to tech companies, investors are showing a clear preference for Google (GOOG) over Apple (AAPL). While Apple remains the stock market’s most valuable company, its shares have fallen 20 percent in the past 12 months, as Google’s have climbed 35 percent, reaching a record high of $834 on March 5. Google has surpassed Apple as the most-owned stock among the 50 largest actively managed mutual funds in the U.S. Its stock also trades at 25 times annual per-share earnings, compared with Apple’s price-to-earnings ratio of 10, according to data compiled by Bloomberg.
The changing fortunes illustrate the power and predictability of the advertising market compared with the volatility of consumer electronics. While ad prices can vary with the strength of the economy, demand is relatively stable. In consumer devices, Apple faces constant pressure to come up with new home runs. “It’s no coincidence that Google’s rise has coincided with Apple’s” decline, says Nabil Elsheshai, an analyst at Thrivent Financial for Lutherans, which owns Google stock. “Making money from services vs. devices is growingly perceived as a better business model.”
Under Chief Executive Officer Larry Page, Google has impressed investors with its strides in mobile advertising. Google will command 55 percent of the U.S. market for mobile-ad revenue this year and 57 percent in 2014, according to EMarketer. In the display-based advertising market, which includes banner ads, Google took the top spot from Facebook (FB) in 2012, while Yahoo! (YHOO) was No. 3, according to EMarketer.
That’s helped augment Google’s dominance of digital advertising: It took in 40 percent of the $37.3 billion businesses spent on online ads last year. Google also has used an alliance with Samsung Electronics to gain share in mobile software, feeding the competitive threat weighing on Apple. “There’s only one company benefiting from all the growth areas of the Internet—be it video, mobile, local, social, display advertising,” says Sameet Sinha, an analyst at B. Riley & Co. “Apple has just done well in devices, nothing else.”
Naturally, there’s no guarantee Google will remain investors’ favored stock. Apple CEO Tim Cook has said the company is exploring new TV-related products, and multiple reports suggest its engineers are developing a wristwatch device. A more robust Apple TV could add to revenue while spurring demand for other products, from apps to movies to high-end electronics. An iPhone-like watch could command margins in the neighborhood of 60 percent, according to a Bloomberg Industries analysis.
Google hasn’t produced a hit smartphone that would help it make good on last year’s $12.4 billion acquisition of Motorola Mobility Holdings. The shift to mobile also has disadvantages because ads shown to handheld device users command lower prices than those appearing on personal computers.
Still, Google is well positioned for the continuing shift of ad dollars to digital. Web-based advertising is the fastest-growing medium globally and should become the No. 2 category this year, with 20 percent of the market, surpassing newspapers, according to ZenithOptimedia. Television still dominates, with 40 percent—though Google is poised to make inroads in that market through YouTube. “There’s still huge organic growth for Google to penetrate,” says Michael Scanlon, an analyst at John Hancock Asset Management. There’s a strong “tailwind of things going from print and TV to online.”