Better Buy: Alphabet Inc vs. Apple Inc.

By Brian Stoffel Markets Fool.com

Image source: Getty Images.

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Let's rewind back to September 1998. Steve Jobs had just rejoined the company he had founded two decades earlier:Apple (NASDAQ: AAPL). Two 20-somethings named Larry Page and Sergey Brin founded a company they thought could help organize the world's information: Google -- which later becameAlphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).

The former was worth just over $5 billion, while the latter was worth virtually nothing. Fast-forward not even two decades and they are arguably the two most powerful companies the world has ever known, with a combined market capitalization of almost $1.2 trillion!

But which stock is a better buy at today's prices?

There's no definitive way to answer that question. However, there are many different ways to approach it that will help you get more comfortable picking one of these two titans. Here are the three aspects that I consider to be most important.

Financial fortitude

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Too much cash is a good problem to have. Over the long run, owning a company that has this kind of cash "problem" is very desirable. That's because when difficult times hit -- and they will hit -- companies that have cash have options. They can outspend their more cash-strapped rivals, buy back their own stock, or even make acquisitions.

Companies that are debt-heavy, on the other hand, find themselves in the exact opposite boat: struggling just to make ends meet, exploring options to be bought out, or even succumbing to bankruptcy.

Here's how Apple and Alphabet stack up in terms of financial fortitude.

Company

Cash

Debt

Net Income

Free Cash Flow

Alphabet

$78 billion

$2 billion

$19 billion

$24 billion

Apple

$238 billion

$75 billion

$46 billion

$53 billion

Data source: Yahoo! Finance. Cash includes short and long-term investments as well. Net income and free cash flow are presented on trailing-12-month basis.

It would be very difficult to find two companies that have stronger balance sheets. While it's clear that Apple's numbers are greater than Alphabet's -- even after accounting for the fact that Apple is valued 11% higher than Alphabet -- the point of this lens is to see if one company has substantially more flexibility due to its cash than another.

Once we get to the point that these two companies are at, it's essentially a wash.

Winner: Tie

Sustainable competitive advantages

Of these three factors, this is perhaps the most important. Commonly referred to as a "moat" in investing circles, a company's sustainable competitive advantages are often the special sauce that separate it from competitors.

Some might be surprised to hear that I think Alphabet has a much stronger moat than Apple. Apple's moat is two-fold. First, it has a very powerful brand -- even more so abroad. That allows the company to charge more for its products than competitors. Second, the company has been building out an ecosystem that keeps users hooked in the system. For example, if your iPhone is synced with your Mac, your iPad, and your Apple TV, you'd be loath to switch to a different phone.

But the major weakness here is that the company has traditionally relied on coming up with "the next big thing" to drive sales. The iPhone was arguably one of the biggest consumer hits ever, but it has been a long time since Apple has released a product that even comes close to touching the iPhone's popularity, and the competition is always clawing for market share.

Alphabet, on the other hand, has the type of moat that famed investor Charlie Munger once said might be the widest he'd ever seen. That's because Google has a dominant search market share globally. But search is just one of seven Alphabet products that have over 1 billion users. The others are: Android, Chrome, Maps, Google Play Store, Gmail, and YouTube.

Think about Alphabet's moat like this: With each additional user that gets in Google's ecosystem, the company collects copious amounts of data, all of which can be used to offer advertising that's more targeted than anywhere in the world. In the end, those ads are what pays the bills at Alphabet, and with the exception of Facebook, there isn't a company (or government) on earth that can come close to Alphabet's data trove.

Winner: Alphabet

Valuation

Finally, we have valuation. This isn't an exact science, but here are four metrics I like to check when evaluating stocks.

Company

P/E Ratio

P/FCF Ratio

PEG Ratio

Dividend

Alphabet

24

24

1.3

0%

Apple

14

12

1.5

2%

Data sources: Yahoo! Finance and E*Trade. P/E represents figures from non-GAAP earnings. Alphabet C shares used in calculations.

While Alphabet appears to be slightly cheaper relative to its growth potential (PEG ratio), Apple is a better deal on every other metric. It's tough to find a company as successful as Apple that's trading for quite so cheap. And the fact that you get a 2% dividend -- which is both safe and has room for growth -- is the icing on the cake that makes Apple the winner of this round.

Winner: Apple

Final call: Draw

Both companies are solid. Apple is the cheaper stock; Alphabet has a stronger moat. As a tie-breaker, I go where my own skin in the game is: I'd definitely side with Alphabet. The company represents 13% of my family's real-life holdings, while Apple clocks in at just under 4%.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Alphabet (A shares), Alphabet (C shares), Apple, and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Facebook. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.