In the race for being the company that is worth the most in the world, the winner has finally been announced. Interestingly, predictions had been going in two different directions over the past few days, with some believing Apple would continue to hold the crown, while others thinking that Google, or Alphabet, would take it. The results are finally in and, with a $568 billion value, Alphabet is the winner. Apple came in a close second, however, being worth $535 billion.
This means that Alphabet is now the listed company that is the most valuable in the world. Their global revenue, year on year, actually increased by 13% to $75 billion. Controversially, however, the tax rate for the company fell to just 17%, and this is something that has caused them quite a few problems in the United Kingdom in particular.
In the UK, $1.9 billion in revenue was earned by customers in the final quarter of 2015. This is a 16% rise compared to the same time period in the year before. However, all of this money has gone through Google’s complex Irish tax structure. Additionally, because the value of the pound has weakened against the dollar, the revenue should actually have been up by 20%, even more than reported.
While Google has come to an arrangement with the British tax authorities, many people do not believe that the arrangement is in any way fair. The company made $5 billion in sales revenue in 2015 as well and paid virtually no tax.
Google Inc earns “substantially all” its foreign profits in Ireland, according to its annual report but only a small proportion of these are taxed in Ireland because of royalties paid to Bermuda, where its non-US intellectual property is held. The revenues that go to Google Ireland Ltd flow on to Google Ireland Holdings, a Dublin-registered company located in Bermuda for tax purposes, which owns the intellectual property that Google Ireland Ltd is licensed to sell.
Meanwhile, although the general British public is angered by this, the world of finance is responding very differently. Almost instantly after announcing that Alphabet is now the most valuable country in the world, the company’s share price rose by 9% instantly. This meant that the stock market value for Alphabet truly eclipsed that of Apple.
Nevertheless, experts warn that these figures are somehow skewed. While it is true that Alphabet is now the most valuable, this is not solely because they have higher earnings than Apple. It also in part because the earnings report from Apple was nothing short of mediocre. Additionally, while the parent company is called Alphabet, the real top earner in this was Google. In fact, if Google is separated from Alphabet, Google would itself be bigger than Fiber, X and Calico, other Big Idea companies, but Alphabet would be much less valuable.
On the other hand, the reality is that Google has separated each of the newly minted companies and called them ‘Other Bets’, keeping them away from Google proper. And, while the moonshot ideas that these ‘Other Bets’ offer are very interesting, they are also proving to be real money pits. In fact, last year, Alphabet spent $3.6 billion on them. By contrast, Google itself had an income of $23 billion, and a total revenue of $74.5 billion.
Some specialists are also applauding the company due to the fact that the new year has already seen Alphabet and the broader market struggle significantly.
But the company has still outpaced Apple since Alphabet reported second-quarter profits in the middle of July, surging 28% through Monday’s close while Apple shares have fallen 25% amid concerns about slowing sales of its flagship product, the iPhone. Alphabet shares added to their rally Monday night after the company reported earnings and revenue that beat Wall Street’s consensus.
The Alphabet market cap is calculated with a complex algorithm. Essentially, all the company’s shares market value, class A, B and C, are added up together. Class A and C are the types of shares that are available on publicly traded markets. However, those who own class C shares do not have any voting rights. Class B shares, meanwhile, are the types of shares that are owned by people inside the company itself, and these can be converted to a class A share.
When the market closed, class A was valued at $242 billion, class B at $42 billion and class C at $281 billion. This equates to $565 billion in total. It is also important to understand that Alphabet does now have the highest overall market value. Yet, there is a market cap for S&P 500 traded shares, which stands at $483. By contrast, this is a good 10% lower than the $539 billion of Apple.
An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. The S&P 500 is a market value weighted index – each stock’s weight is proportionate to its market value.
The reason why Alphabet is worth less is because the S&P does not include the B shares in this calculation. Furthermore, the class C shares are subjected to a float adjustment, which means that some of these shares are held internally and are not available for public trading. Hence, only 86% of the C shares are counted, as Alphabet reports that 14% of the class C shares are internally owned.
Alphabet is now the 12th company that has ever been able to earn the ‘most valuable company’ award in the history of the S&P 500 index. Other companies that have held the title include Apple, Exxon Mobil Corp, IBM and Microsoft. Usually, companies hold the title for a number of years. Apple was the 11th company to earn the title, but they have now had to secede.