Google vs. Apple: Which Smartphone Stock is a Better Buy?

The next month should be a critical one for technology giants Alphabet (GOOGL) and Apple (AAPL), as both companies are expected to unveil brand new hardware lineups. For Apple, the iPhone 15 will be revealed at its Sept. 12 “Wonderlust” event, while Google just confirmed Oct. 4 as the date for its Pixel 8 launch. 

Year to date, Google’s parent company Alphabet is up an impressive 53%, and Apple shares are over 46% higher. Both are outperforming a gain of 34% for the broader Nasdaq Composite ($NASX) - but while GOOGL hit a new 52-week high in August, AAPL is recovering from last month's post-earnings sell-off.

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Though Pixel sales make up only a small percentage of Alphabet’s revenue, it’s in one of the company's fastest-growing segments, and many analysts are paying close attention to the device's success. For Apple, although the company is trying to diversify away from the iPhone, the product still makes up almost 50% of revenue, and will have a large influence on its stock price. 

Let's take a closer look to decide which is the better smartphone stock right now. 

Sales 

In early August, one of the biggest reasons that Apple stock dropped after earnings was disappointing iPhone sales, as overall revenue fell for the third consecutive quarter. While Apple typically reports softer iPhone revenue in the quarter immediately preceding its regularly scheduled September device launch, the impact of higher inflation also weighed on results this year - and the smartphone industry at large is declining, as well. 

Despite these broader industry headwinds, Google Pixel sales increased sharply during the first quarter of this year. Global sales of the device were up an impressive 67% YoY, powered in part by an enthusiastic adoption in the Japanese market. This is due largely to Alphabet’s ability to maintain quality design and increased marketing for the Pixel, while still offering a mid-range price point.

Product 

Though Pixel is a new entrant to the smartphone market, it offers a high-quality product at an attractive price. That's one reason why sales exploded so rapidly - but in the smartphone industry, it's not easy to maintain that kind of momentum over the long haul. That's particularly true when you're a software and advertising company at heart, like Alphabet, competing with massive hardware giants like Samsung and Apple for market share.

Apple, meanwhile, has some of the most loyal customers in the industry. Consumers are quite happily locked into Apple’s “ecosystem,” with services and other software compelling customers to stay with iPhones over time. As a result, Apple has a high customer retention rate of 90%, and recently surpassed more than 1 billion paid subscriptions.

Which company will win?

Apple’s decline in sales seems likely to be both temporary and seasonal in nature, and - while the well-established iPhone can't grow market share as fast as the upstart Pixel - its fiercely loyal customer base means Apple's flagship device isn't going anywhere anytime soon. And while a potential recession next year may further curb spending, Apple’s focus on higher-income shoppers could help to keep its sales somewhat insulated from economic turbulence.

The Pixel is a good product, and with more focus from Alphabet, could further expand its market share. However, in the fiercely competitive smartphone market, the harsh truth right now is that Pixel’s primary advantage against Apple is its price point - and from an operational perspective, that leads to tighter margins. Plus, if the economy turns south, the value-minded demographic the Google Pixel is targeting will likely delay spending on higher-ticket items like smartphones as long as possible.

While the Google Pixel has more potential to grow its customer base, I expect Apple’s iPhone sales to continue chugging along without any major downsides. In this challenging industry, that gives Apple the advantage in this smartphone stock face-off.

On the date of publication, Michael Que did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.