Google VS Apple: Who is More Profitable?

Google vs Apple: Who’s really more profitable? In this video, Steve dives into the financials of two of the world’s biggest tech giants to see how they truly stack up.

You’ll learn how to read and compare their income statements, balance sheets, and cash flow statements—plus uncover the key metrics that reveal their profitability, growth potential, and long-term financial strength.

If you want to think like a CFO and understand what drives success at the highest level, this financial breakdown is a must-watch.

TRANSCRIPT:

Who's more profitable, Apple or Google? We're gonna analyze these two companies side by side, and I'm gonna teach you how to analyze a company and uncover their revenue, their profitability, their return on invested capital, their free cashflow, their growth rates, and other items. And trust me, you're gonna wanna stick around till the end because the findings of this analysis may actually surprise you. So let's go ahead and jump in.

Let me set up our analysis here with providing you the ticker symbol. So G-O-O-G is the ticker symbol for Alphabet, which is the parent company of Google. And then we have A-A-P-L, which is the ticker symbol for our beloved company, Apple.

Maybe you think it's beloved, maybe you don't, who knows. But we're gonna evaluate Google and Apple. So I just pulled their public information off their 10K.

We're looking at their most recent reporting period on a trailing 12-month basis. As of today's recording, today is July 25th, 2024. And we're gonna be looking at these numbers in billions of dollars, US dollars, that is.

Let's start with revenue. Revenue represents the income that a company earns from selling its products and services. And for Google, they make $328.3 billion by selling their products and services to customers.

But revenue, remember, is not profit because you have to account for direct costs and indirect costs associated with producing that revenue to arrive at gross margin, also known as gross profit. So when you take the direct and indirect costs associated with producing the revenue, for example, material cost, labor cost, other items are going into cost of goods sold. When you take revenue and you net that against cost of goods sold, you arrive at gross margin, the gross profit.

So they earn $188.3 billion in gross margin, not bad. Now, when we're doing an analysis, we wanna express these things as a percentage of revenue. And that's what I'll do here, is I'll just take the gross margin and I'll divide it by revenue.

And their gross margin is 57.4%, which is amazing. When I had my landscape design build company, we were doing high-end projects and our gross margin was anywhere between, I'd say, 35 and 45%. Some of our jobs where we really crushed it on, we earned 50%, but that was not the average.

Google, on average, earns a 57% margin on their revenue, which is amazing. Let's keep going. Let's look at EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

And Google earns $115.4 billion of profit. So if you take gross margin and you subtract out operating expenses, OPEX, you arrive at some variation of profit. First, we're gonna look at EBITDA, and this gives us an apples-to-apples comparison, company over company, because we are ignoring the capital structure, because we're not accounting for interest, and we're ignoring depreciation and amortization on their assets.

All right, so that's EBITDA right here. And as a percentage, EBITDA percentage of revenue, it is 35.2%, not too shabby. So if you take their gross margin, like I said, you subtract out their overhead costs, which includes their general and administrative payroll, occupancy expense, sales and marketing, professional fees, insurance, other items associated with running the business, they end up with 35.2% without accounting for interest and depreciation and amortization.

All right, but we're still not done. Let's look at operating income, which I'll just abbreviate here, OI. This is the amount of profit they earn from their normal operations.

All right, and that is $97.9 billion. Then, if we take their operating income, and let's just assume the corporate tax rate of 21%, and we apply that to their operating income. Now, taxes could be kind of nuanced for every company because there may be deferred taxes and tax credits and other items like that.

So I'm just gonna apply a 21% corporate tax rate to their operating income so we can arrive at net operating profit after tax. This represents the amount of profit they're earning after tax from their normal operating activities. All right, so their NOPAT is 77.3% billion, okay, not too shabby.

And then NOPAT as a percentage of revenue is 23.6%. Let me ask you a question. What do you think is a good net operating profit after tax percentage for just most industries? If we just look at all industries in general, the answer is around 10%, okay? So Google surpasses that quite a bit and they earn very healthy profits, no surprise, right? So 23.6% net operating profit after tax. And then we are going to come down here and look at some things on the balance sheet and the statement of cash flows, which are two financial statements that I absolutely love, especially the statement of cash flows.

Invested capital includes both, all right, I'll just write here, net PP&E plus working capital. And working capital does not include excess cash, so you have to back that out, and interest bearing debt. All right, so if you combine net PP&E and working capital together, this represents how much capital is required to generate the business and ultimately generate this up above.

So Google has 295.2 billion, in invested capital, and a metric that I like to look at when I'm evaluating companies is return on that invested capital. So to find this, you just take net operating profit after tax, right up above here, and you divide that by invested capital. All right, so the return on invested capital for Google is 26.2%. If you do this along, if you're watching this video and you have a spreadsheet open up at the same time, you can follow the math here.

Also, if you want, you could do it manually, just on a piece of paper, using your handy dandy calculator. But if you follow along, then you'll understand the mechanics of what I'm doing here, and this will help you in your business, because that's my intent. In this video, I wanna walk you through the key components that I like to look at when I'm evaluating a company, and you can translate this to your privately held business or the company that you're working in.

And if you're an aspiring finance professional, and maybe you're a student, or maybe you're just an up-and-coming in your business, if you learn how to do this in your own business, trust me, you're gonna be a value creator. You're gonna be able to generate a lot of profits and cash flow for your company, which will then allow you to make more money. So understanding this and building these skills are super critical.

All right, let's keep going. Return on invested capital. Net operating profit after tax, divided by invested capital, gives us a return on their invested capital of 26.2%. Then if we go over to the statement of cash flows, and we look at free cash flow, which is computed by taking their cash from operating activities and backing out cap X, capital expenditures, we arrive at $60.8 billion.

This is the amount of cash that's available to either pay down their debt, return to equity providers, or to reinvest in the business. This is really important because I always talk about this in my videos and my podcast. Free cash flow is not the same thing as profit, right? Too many organizations focus heavily on profit, but look, there's a discrepancy here because there are other items caught up in free cash flow.

So you take net operating profit after tax, you have to account for things like your changes in working capital and your cap X, and you'll notice there's a discrepancy here. So for some organizations, that discrepancy could be really big, and if you don't pay attention to it, you could go bankrupt. That's why 70% of companies that go bankrupt are actually profitable when they close their doors because they have profits, but they don't have cash flow.

Right here, the spread's not too bad, and I'll show you this. Free cash flow as a percentage of revenue for Google is 18.5%, which is really good.Next, let's evaluate the P-E ratio, which stands for price to earnings.

Now, this ratio doesn't always do a good job of determining the valuation of a business, but it is just a good representation of how much investors are willing to pay for earnings of a business. So the price that they pay compared to earnings for Google is 23.9X, meaning they're willing to pay $23.9 for every $1 of earnings, and I'll explain here why after we look at the last two.

So we have growth, and I'll just put next five years, and we have growth for the last five years.

All right, so that's where we are down here at the bottom of the screen. The growth for the next five years for Google is forecasted at 20.5%. Getting a little tight here, I'm squeezing this all in, all right, like a fat guy in a little coat. And then we have growth over the last five years for Google was 24.3%.

All right, I'll talk about this section right down here as it pertains to the value of the business in just a minute, but now that we have Google listed out, and I walked you through each of these line items, let's go ahead and move over to Apple and evaluate how their numbers stack up.

So what do you think? Let me ask you this. Do you think Google earns more revenue than Apple, or vice versa? What do you think?

See, initially, before I did this analysis, I thought Google actually earned more revenue than Apple because they're a behemoth, right? Think about all their products and services. But Apple, in fact, wins the day with revenue, and they generate $381.6 billion, about 50-ish billion dollars more than Google, right? Pretty surprising there.

What's next is gonna surprise you, especially when we get down to the end here of our analysis. You may be a little surprised by a few of the numbers that I put up here on the screen. So stick with me here.

We have gross margin, 174.0 billion. And then if we just take gross margin divided by our revenue, we end up with 45.6%, all right?

So let me keep going, and then we'll do an analysis here at the very end to tie everything together. EBITDA, 133.0 billion compared to 115. Which brings us in at 34.9%. EBITDA as a percentage of revenue.

Operating income is 118.2 bill. NOPAT is 93.4 billion dollars. And NOPAT as a percentage of revenue is 24.5%.

Going down the line, stick with me here. Good stuff is right around the corner. 173.2 billion dollars in invested capital. That's how much money Apple has tied up in its net property, plant, and equipment, plus its working capital.

Its return on invested capital is 53.9%. Free cash flow, they're able to generate 101.9 billion, which is 26.7% of their revenue.

I'm going kind of fast, but trust me, I'm gonna come back to this. I'm gonna slow down, and I'm gonna drive home the key points here in just one second. Let me just finish writing up on the whiteboard here.

All right, the P-E ratio is 33.8X, followed by a growth rate for the next 10 years anticipated at 10.5%, compared to growth over the last five years of 20.1%.

All right, we did it. We listed out all the numbers. Now, instead of doing this in an Excel spreadsheet where there's a little bubble up in the corner and you see my talking head, I wanted to do this face-to-face on the whiteboard because when you write this out and when you go through this process, things click, trust me.

So let's look at these numbers and evaluate the performance. I'll use a red marker here. And let's just look at revenue.

So Apple has Google beat as it pertains to revenue, but revenue, shrevenue, who cares about revenue? At the end of the day, it comes down to the margin that is earned on that revenue.

So check this out. Apple does about $50 billion more work compared to Google. But look at their margin.

Apple's margin is 45.6% compared to Google. So sure, Google does less work, but their margin is a lot higher, 57.4%. So they're actually able to earn more gross margin on the sales of its products and services compared to Apple.

Now, this may not be as big of a deal for a company like Google versus Apple where a lot of their products and services are tech-based, but think about it.

In your business, imagine how much more grind you have to go through in order to earn this extra revenue, but you're earning it at a lower margin.

So when I'm working with companies and I'm helping them to grow or turn around, this is the first line that I look at is gross margin because I want them to understand how much margin or spread they're earning after they're pricing their products and services and then they're going out there to execute and deliver these products and services to their customers.

And imagine you're a construction company. You'd have to build so many more buildings just to produce this extra revenue only to earn less margin than a company that's doing less.

So maybe there's another company out there and they're building five buildings less than you. They're not going through all that heartache and the headache and the permitting and working with contractors and the warranty and the risk and everything else, but they're still earning higher margins.

So in your business, you definitely wanna take a look at this and understand, is this a healthy number for you and what can you do in order to improve this? And there's three drivers. You can increase your price, you can reduce your cost, you could become more efficient or you could do more volume, right?

So this is a really important number and Google has Apple beat. Let's look at EBITDA, which is Earnings Before Interest, Taxes, Depreciation and Amortization.

And if you account for operating expenses to get down to EBITDA, you'll notice that both of the companies are pretty much in parity as it relates to their EBITDA.

So Apple, even though their margin is lower up here, they're able to run their business with a lower operating expense structure and therefore they make up some lost ground and they come back into check about 35%, right? So that's about even.

Then we end up with Operating Income and Net Operating Profit After Tax. And then Apple steals the show back here and earns a higher Net Operating Profit After Tax compared to Google, right?

Just slightly here as a percentage of revenue and in nominal terms as well. But then this is the surprising part, right?

Look at the amount of invested capital that's required to run both businesses. For Google, they need nearly $300 billion in both net property plan equipment and working capital to generate this revenue and these returns.

Whereas Apple has a much lower capital base. And this is really critical to understand in your business. You have to understand how much invested capital is tied up in your business in order to generate your returns.

And when you figure out this base, right, by adding up your net PP&E and your working capital, and then you take your Net Operating Profit After Tax and you divide that by your invested capital, this number is gonna be really surprising.

So look at this. Apple is able to earn a 53.9% return on their invested capital compared to Google, which is 26.2. Now, don't hear me wrong, because 26.2 is still fantastic, it's still great.

But Apple is able to produce a lot more revenue than Google off a lot lower capital base. In other words, they don't have to have all this capital tied up in their business in order to operate, which makes Apple very attractive.

Let's go down to free cash flow. Google generates 60 billion, Apple generates 101 billion, which for Apple, it's 26.7% of the revenue compared to Google, 18.5%.

Then if we look at the price to earnings, in other words, how much is somebody willing to pay for Apple versus Google on an earnings basis, investors are essentially saying, hey, we are willing to pay 23.9X for every $1 of earnings. That's what their stock is currently priced at as of the day of this recording, right, compared to Apple right here, which is 33.8.

So you may wonder, okay, well, why would somebody be willing to pay more in earnings for Apple compared to Google?

And this is where valuation comes into play. And these metrics are really important, and I highly recommend that you calculate these metrics in your business.

This is what I do when I'm evaluating businesses and when I'm working with companies, because when I look at return on invested capital, okay, Apple's higher, so that makes sense.

When I look at free cash flow, free cash flow is what it's all about. When you think about the intrinsic value of a company, it's essentially the present value of all the future cash flow that the business will generate.

Valuation is driven by free cash flow, not profitability, because profits don't tell the whole story, because there may be capital expenditures and working capital that is significantly higher, and it's not captured in this number, and that's why you have to look at free cash flow instead.

So Apple is able to generate a lot more cash flow on its invested capital and on its revenue compared to Google. And then we have to look at growth.

So Google is expected to grow at a 20.5% growth rate compared to Apple, which is slowing down in the next five years. It's gonna only grow at 10% compared to 20% over the last five years. So that is playing a part as well in the valuation.

But overall, when I look at the value of the business, I'm looking at three main things, free cash flow, return on invested capital, and growth. And that's what the market is doing as well, and you'll notice that's why Apple is trading at a higher value as it relates to price to earnings.

So that's how you break things down when you're analyzing a business.

Isn't that so much fun? We just looked at how much Alphabet is earning compared to Apple, and now, when you're hanging out with your friends or when you're around the dinner table tonight, you can say, look, hey, here's a little trivia. Who makes more money? Who's more profitable? Who generates more cash flow?

And hopefully this has you excited to do this more in your company and in other businesses that exist out there. And this is how you can make a lot of money is when you understand the story behind the numbers.

If you want help with this, if you're interested in learning the mechanics behind everything that I'm doing, I have two great programs at byfiq.com that you may wanna check out.

First is the Fundamentals of Finance, and the second one is the Financial Pro, right? So I'll leave it at that if you wanna check it out.

But thanks for joining me as I walked you through these numbers and I taught you how to do an analysis.

And now, hey, you know, Apple is the winner as it pertains to performing better from a financial perspective.

All right, that's all I have. Be sure to share with your friends so we can spread the word.

Cheers.