Silicon Valley rivalry: Google valuation moves past Apple

The search giant is rushing to build a substantial hardware business in its pursuit of Apple. It risks alienating its shareholders.

The stock market has been very good to Apple over the past decade but does its business have a solid future? The Wall Street Journal points out that Google's business is now valued higher than that of Apple.

Rolfe Winkler on the Moneybeat column reports:

Strip out Apple’s $145 billion of net cash as of March, and Google’s $45 billion. This leaves an enterprise value of $233 billion for Apple, but $241 billion for Google, reflecting the underlying value of the companies’ actual operations.

Clearly, investors are less enchanted by the future prospects for Apple's {$AAPL] hardware sales compared with the far higher profit margins on advertising that a media company like Google [$GOOG] can earn.

Apple has lots of competitors while Google dominates its markets with no challengers. Ad sales are susceptible to swings in the broad economy but so are sales of electronics.

Apple has done well to maintain high profit margins on consumer electronics  and computer hardware but this is overall a low-margin business for the rest of the industry.

It's strange to see Google trying its best to copy the Apple business model by creating a large hardware business. It paid $12.5 billion last year for Motorola Mobility, it is focusing chief executive attention, and substantial internal resources on developing a range of products from computer notebooks, to music systems, and mass consumer products such as Google Glass.

The risk for Larry Page, CEO of Google, in pursuing this Apple-like strategy is that the new business group won't be able to match the profitability of its media business. Which it clearly won't, and that means earnings per share will fall.

The more Google tries to be like Apple, the more it's investors might start to behave as those in Apple and leave. Over the past year, the iconic computer maker's share price has suffered a steep decline, from a high of $705 to $399.

Mr. Page risks alienating his shareholders. There's a big difference between the investment philosophies of  the two groups of investors. Apple shareholders prefer to invest in the future of digital hardware markets; while Google investors are betting on the future of digital media. It's a big difference. 

If Google's investors wanted to own a hardware company stock they would have bought one. The more Google becomes a hardware business, the less attractive it becomes to its shareholders.