They are undoubtedly two of the most powerful companies the world has ever known. One is the manufacturer of the iPhone, the original smartphone – the device that fundamentally changed the way we interact with each other. The other has taken all the world information and puts it to hand.
Of course I am talking about Apple (NASDAQ: AAPL) and Alphabet ] (NASDAQ: GOOG) (NASDAQ: GOOGL) often familiar with the name of its largest subsidiary: Google. Investors in both companies have experienced enormous gains over the past 1
I will not pretend I can tell you the answer to this question with 100% certainty. I can not. And neither can anyone else.
But we can evaluate these two on three different continua and see what emerges.
I am a long-term investor. When I buy a share, I think about where it may be when I retire … 30 years from now. So I have accepted the fact that I will endure more than my fair share of market swoons and financial setbacks.
What I want to know is whether the companies I own can actually benefit from such tough times. How can that be? Well, companies flushing cash can repurchase their own shares when they are on sale, or acquire rivals at a discount – or simply offer offers that the competition does not match, leading them to bankruptcy. Whichever way such companies take, they come out of a decline stronger because of it.
Remember that Alphabet and Apple are about equal in market value:
|Company||Cash||Debt|| Free cash flow
|| $ 245 billion
|| $ 93 billion
|| $ 62 billion
|Alphabet||$ 119 billion||$ 4 billion||$ 23 billion|
Technically, Apple is coming. It has a larger net cash position (cash minus debt), and stronger free cash flow. At the same time, the whole point of this exercise is to measure whether a company would go better than the other in a decline.
Because these are both so strong balance, with such a strong free cash flow, I am willing to call this a tie. Both companies can benefit from an economic downturn. In fact, I think the alphabet will cost better, as Apple's revenues depend on the very discretionary and costly purchase of iPhones (more on that below).
Winners = Tie.
Next we have valuation, which is a fancy way of saying that we will find out which stock is "cheaper" than the other. And for novice investors, a stock price is not an accurate reflection of whether it is cheap.
Instead, measuring a stock price relative to other calculations – such as its earnings (P / E), free cash flow (P / FCF), or potential for growth (PEG ratio) – gives us a better picture of what we pay for. To understand these two in relation to their price tags:
|Company||P / E||P / FCF||PEG ratio||Dividend yield||FCF payout ratio|
|Apple  14 [  1.0||1.8||23%||1.8%||23%||28||  Data Sources: Yahoo! Finance, E * Trade. P / E = price for earnings, P / FCF = price for free cash flow, PEG = price / earnings for growth. P / E presented using non-GAAP (accepted accounting principles) numbers when applicable. N / A = not applicable, as no dividend is offered.
Here we have a much clearer winner. Apple is not only cheaper on the basis of earnings and free cash flow, but also cheaper compared to growth prospects. And like a cherry on top, it even offers a dividend. Because less than a quarter of free cash flow is spent on dividends, both are very safe and have plenty of room for growth.
Winner = Apple.
Sustainable competitive advantage
] Finally, we have far and away the most important – and difficult – measure: sustainable competitive advantages – or "moats", as they are discussed in investment circles. Moats are the forces that hold businesses all over the world for decades while the competition is trying to get hold of the business.
In general, there are four different moats companies may have:
Let's start with Apple. The company's largest moat comes via its branding power. While iPhones and iMacs can be step by step better than their competitors, consumers are willing to pay a much higher premium than may be justified in having the silver Apple logo on their device. Forbes supports this theory and gives Apple the highest brand value in the world – worth $ 183 billion.
But that's not all; Apple has also kept customers around at high exchange rates. Think about it: If you have an iPhone, an iMac, or a MacBook, and / or an iPad, and you've all been in sync with all of your documents uploaded to iCloud – it would be a royal back pain to swap.
For example, while purchasing an Android phone, it may make sense to change the equation when considering everything you want to give up to do so. This helps explain why many investors are so excited about Apple's booming services – it is symbolic of a growing burden of high cost.
However, the alphabet has its own staff of moats. Although not as strong as Apple's, the company also has a very high brand value. Forbes estimates that Google is the second most valuable brand in the world, worth $ 132 billion.
The company also benefits from the same high switching costs as Apple, but again, on a smaller scale. If all the photos you take on your Android phone and all the documents from your Chromebook are automatically uploaded to Google Drive – and you have those devices in sync – you're less likely to buy an Apple device.  But Google's real bargain comes in the form of low-cost production. "Production of what?" you can ask. Data – large, huge, monstrous gobs of data. Google has eight different services with over one billion users each: Search, Maps, Gmail, Google Play Store, Google Drive, Chrome, Android and YouTube.
Most of these products are free to use and it's okay with Google. The company can collect your data, turn it over and sell it to advertisers for the type of laser-focused ads that no one else (other than Facebook ) can offer. At the end of the day, it is important to remember that Google – and thus the alphabet – is actually an advertising agency. Over 85% of the alphabet's revenue comes from advertising.
Believe it or not, there is another important wrap worth mentioning: YouTube, the world's second most popular site behind Google, has benefits from the network effect. People who make videos know that others will watch them on YouTube. It draws even more users – and thus more manufacturers. It's a virtuous cycle.
While Apple's moat has proved much stronger than I once thought, I think that Alphabet is superior in the long run.
Winner = Alphabet.
My winner is …
So there you have it. When these two titans go from top to top, there is a tie. When that is the case, I always give the edge to the company with the widest moose – in this case, Alphabet. My own personal portfolio supports this belief: The alphabet makes up over 10% of the family's real team.
While I have great respect for Apple and for what Steve Jobs and Tim Cook and their team have achieved, I think it's much better to invest in services (Alphabet) over hardware (Apple). While an investment in either has proven to be a good move, I think Alphabet is a better long-term game.