Innovation will see Apple pull through

If ever the peculiarity of stock markets was ever illustrated, it may have been this week when, fresh from posting the highest quarterly profits of any company in history, Apple slipped from its perch as the world’s most valuable company.

It has long been known, however, that perception wields more power in the world of technology valuations than a profit and loss account ever can — even one as healthy as Apple’s.

As Michael Lewis outlines in his latest book, The New New Thing, serial technology entrepreneur Jim Clark founded three separate billion-dollar companies before flogging them to the public for ever-increasing returns on the back of ever-diminishing evidence of their potential success.

Instead, Mr Clark leaned on the perception that everything he sold turned to gold and rode off into the sunset with billions in his pocket.

So while Google’s parent company, Alphabet, is cut from a different cloth to Mr Clark’s startups, the belief it has instilled in investors has seen it overtake Apple as the most valuable firm on the planet, with a market capitalisation of $543bn (€497bn) following its latest earnings update, compared to Apple’s $530bn.

Given that, a little over a year ago, their respective valuations stood at approximately $360bn and $640bn, it has been quite a turnaround.

Alphabet only gained 1% Tuesday - but it was still enough to keep its market cap above Apple’s $AAPL $GOOGL https://t.co/EZSkpPNopq

— USA TODAY Tech (@usatodaytech) February 3, 2016

Since then, two major changes have occurred, the first of which was Google’s reorganisation last August into Alphabet.

The beauty of the decision to establish the holding company and offer investors greater visibility on its decisions and the accompanying cash being spent is now becoming apparent.

Along with Apple’s sales warning on the back of a slowing Chinese economy, the confluence of these two events has allowed the search engine giant to claim the top spot, according to Digital Marketing Institute director Ian Dodson.

“The whole Google thing started about 15 months ago when they poached the chief financial officer of Morgan Stanley, a lady called Ruth Porat, as their chief financial officer and she brought a real understanding of what it is shareholders want,” said Mr Dodson.

“Google has had a semi-antagonistic relationship with shareholders up to that point and she changed it and one of the things she did was she put in a different company structure.

“Now people can see the crazy projects are only costing a couple of billion, $2bn or $3bn a year and actually the Google search revenues itself are strong, and I suppose that really has calmed the market’s nerves, it has allowed the institutional investors to stay in and resulted in the spike in shares.”

While more adventurous, or “crazy”, projects are largely loss-making, the core business remains strong.

And before anyone sheds a tear for Apple, it is important to remember those record-breaking profits — all $18.4bn of them.

A long tradition of innovation should see it through any minor downturn.

“Apple invest huge amounts of money in innovation and research,” said Mr Dodson.

“Intel survived two global IT downturns because in those downturns they invested half their profits in research, so companies that do that, it always bodes well for the business, and Apple will rebound.”