Apple’s financial strength outpaces Alphabet’s growth amidst AI investments

Apple’s revenue was bolstered by $2.10 per share, exceeding the anticipated $1.98, with $0.05 attributed to tariff refunds. iPhone revenue reached $57.6 billion, a 17% increase, despite supply chain challenges, demonstrating robust consumer demand. The company’s services sector achieved a record $31.6 billion in revenue, boasting a 76% gross margin, fueled by a user base exceeding 2.5 billion active devices. CEO John Ternus celebrated it as “our best fiscal year ever.”

Alphabet’s Google Cloud division experienced substantial growth, increasing by 103%, and its operating income surged to $11.12 billion from $3.59 billion. This rapid expansion occurred despite the company’s considerable size. Sundar Pichai highlighted “strong demand for our TPU systems across a wide range of customers.” However, Alphabet’s earnings per share landed at $2.12, falling short of the $2.97 estimate, largely due to an $8.7 billion loss on equity securities.

Apple’s full-year capital expenditures decreased by 28.9% to $9.04 billion, while operating cash flow reached $145.10 billion. The company returned $28 billion to shareholders and holds $137 billion in cash against $80 billion in debt, recently adjusting its net-cash-neutral target to allow for greater spending flexibility.

In contrast, Alphabet’s quarterly capital expenditures reached $51.36 billion, resulting in negative free cash flow of $9.07 billion. To address this, the company sold $28.7 billion in notes and issued new shares, which dilutes existing shareholders. While Alphabet’s debt-to-equity ratio remains lower at 0.14 compared to Apple’s 0.71, the reliance on external funding raises concerns.

Apple anticipates a December gross margin of 45% to 46%, slightly below the 47.9% reported recently, citing “unprecedented” memory pricing. The company faces challenges related to memory costs and the supply of the foldable iPhone Duo. Alphabet’s focus now lies on whether Cloud profits can cover its projected 2026 capital expenditures of $175 billion to $185 billion.

Currently, Apple trades at a premium forward P/E of approximately 37, compared to Alphabet’s roughly 19. Apple’s self-funded model and consistent cash generation make it appear as the more stable investment, aligning with the characteristics of a “flight-to-quality” stock. While Alphabet demonstrates stronger growth potential, a shift towards positive free cash flow would be necessary to alter this assessment.