The Internet search giant was trading at 14 times 2011 earnings. While that’s a higher multiple than the average S&P 500 company, it’s not all that expensive for a tech company. The thing is, sales grew at a mere 7% from 2008 through 2010. That’s a huge drop after growing more than 50% annually in the previous three years.
The decline in sales growth was due to increased competition from Yahoo and Microsoft. Also, Google’s market cap was near $150 billion (it’s the 14th-largest company in the S&P 500 based on market cap). Because of its sheer size, it’s much more difficult to grow sales at the 50%-plus rate management was used to seeing.
Still, the company has $30 billion in cash – about $100 a share – and no debt. Revenue growth is expected to rebound to 14% annually through 2012. Also, Google remains dominant in Internet search. So despite my pessimism, I did not suggest shorting Google.
Instead, my advice was to buy Apple.
Apple is also a large-cap tech company with a huge cash hoard ($24 billion). The stock is trading at the same multiple as Google… with one major difference: Apple is expected to grow its sales by more than 27% annually through 2012. That’s about twice the rate of Google.
As you can see from the chart, shares of Apple (black line) have outperformed Google (blue line) by about 8% since my recommendation.
I am not saying this just to pat myself on the back. My point is that comparison analysis is an important tool for traders… Before you buy any stock, take a look at the company’s competitors.
Right now, Apple is the king of tech. Its recent iPad project is a huge success. When the tablet first launched in April, analysts projected sales of 2.5 million by the end of 2010. Today, one analyst predicts Apple will sell 28 million iPads by 2011.
Apple is also seeing strong sales for its new iPhone. Almost every customer buying an iPad or iPhone buys “apps,” programs that can be downloaded through Apple’s online store for a fee. This creates a steady revenue stream on top of hardware sales. The diversity among revenue streams means Apple isn’t a one-product company like Google, which is dependent on advertising revenue.
Going forward, Apple remains the better play compared to Google based on valuation and growth potential. In fact, I can’t find one tech company I’d rather own today than Apple.
Source: Frank Curzio