In the fast-moving world of technology investing, it doesn’t get any bigger than the two predominant global tech giants, Google and Apple. While Google is focused on search and online advertising, Apple has cemented its dominance in the mobile communication, media device, and personal computer space. Both firms stemmed from humble beginnings as informal startups but have come to define our modern technology world, and they have rewarded loyal investors handsomely along the way.
Google and Apple Have Rewarded Investors
The market capitalization of Google (GOOG:NASDAQ) and Apple (AAPL:NASDAQ) is $366 billion and $730 billion respectively. To picture just how dominant Google and Apple have become, it’s perhaps more simple to note that the combined market capitalization of these two companies is greater than the GDP of more than half of the countries in this world. The meteoric performance of each company over the past five years has resulted in Google’s stock increasing from $286 to $541 (189%) and Apple’s stock increasing from $34 to $125, a whopping 368%!
The extremely strong growth experienced by these companies is primarily the result of innovation, which they have been able to consistently monetize. As the world’s most popular search engine, Google has set the standard for online advertising with Google Adsense and has also stepped into the computing world with the introduction of the Google Nexus One phone, Google Notebook and Google Nexus Tablet. The tablet was initially launched in 2012; and since then Google has paired up with HTC, the Taiwanese smart phone manufacturer, to release several upgraded versions, the latest of which is the Nexus 9 released in November 2014.
While it is true that search engines such as Yahoo and Bing have made modest gains in market share, industry analysts do not expect Google to be knocked off its perch anytime soon, especially since Google products such as YouTube and AdWords help to create a dedicated user base that will not be easily convinced to experiment with other products. In terms of search share, Yahoo had its best month in five years in December, thanks mainly to Mozilla making it the default search engine for its latest edition of Firefox. Nevertheless, Google still takes a dominant 75.2% of US search referrals, while Bing and Yahoo are a distant second and third with 12.5% and 10.2% respectively, according to StatCounter Global Stats.
Google was also lauded last year for being among the first big companies to report the diversity of its workforce. While the report left much to be desired in terms of Google’s actual record on diversity, it has shown leadership in disclosing such statistics, with other big corporations following suit.
Google again made headlines with Google Glass and recently it was reported in Vanity Fair magazine that Google is developing a smart contact lens and has already filed patents. The goal is the manufacture of lenses with embedded cameras and monitors that can help diabetics to monitor critical blood sugar levels. At present Google has a solid financial situation with $64 billion in cash and short-term investments as of the end of December 2014.
Apple has become a juggernaut in several segments of the technology world, where only a decade ago most would not even imagine Apple’s presence. The company has become the world’s largest music retailer and just last year announced that fans have bought and downloaded an astounding 25 billion songs. Apple has also taken the lead in the computer sector by producing and selling more devices than all of Microsoft’s Windows licenses combined. It’s quite amazing that while volume has increased Apple has still been able to maintain premium pricing with the average Mac computer – selling for $1,300 versus Windows-based PCs that sell on average for slightly more than $300. Similarly, Apple phones also command premium pricing relative to Windows-based phones, with an average selling price of $650 versus $301. This indicates significant customer loyalty towards Apple.
Apple’s strong brand appeal acts as a defensive barrier in the fiercely competitive tech sector. Apple has consistently been cited as a leading example of innovative branding. By deliberately never mentioning product features during its advertising campaigns, Apple has instead focused on fostering an emotional connection with its customer base, thus creating a fierce sense of loyalty to its brand.
Although Apple has not introduced any real breakthrough products since the death of Steve Jobs in late 2011, its annual sales increased from $108 billion to $182 billion from September 2011 to September 2014 due to upgrades and continued demand for iPhones, MacBooks, and iPads. In May 2014, Apple also made a $3bn purchase of Beats Electronics, the company that makes Beats by Dre headphones. This remains Apple’s largest acquisition to date and includes Beats Electronics’ sister company, Beats Music, which will allow Apple to delve further into the subscription-based music streaming world.
The latest quarterly report followed a similar theme of strong revenue growth. Comments by Tim Cook suggests that the company will continue to increase both its dividend and share buyback programs, putting more cash in the hands of investors. Nonetheless, one of the more stunning announcements over the last year was that Apple would execute a 7-for-1 stock split in June of 2014. Two months later after opening at $92, the stock hit $100 and has since continued this upward trend. While a stock split does not change the overall value of a company, the action increased the participation of retail investors in the trading of Apple’s stock. The company has $32bn in cash on the balance sheet…. perhaps another acquisition?
The company is in the midst of finalizing the launch of its first new product in the post-Jobs era. The Apple Watch goes on sale April 10, with Apple imminently launching a massive rollout, which includes the appointment of a retail chief and the establishment of dedicated stores for the new product.
Are Valuations Attractive for Google and Apple?
Google has been working on several major projects including Project Loon, Google Self-Driving Car, and Google Green – the company’s renewable energy initiative. Larry Page, Sergey Brin, and Eric Schmidt – Google’s management team – have been true visionaries who have executed on ideas that will continue to advance our world. Google is trading at a PE ratio of 26. Compared to the tech industry PE ratio of 24, however, the higher valuation is likely warranted due to the tremendous growth opportunities ahead for the company.
Apple carries $32bn cash and short-term investments in its balance sheet. Apple’s PE ratio is 17, which is lower than the tech industry ratio of 24 but higher than the consumer goods PE of 14 (some investors classify Apple in the consumer goods sector). Having experienced such a strong growth profile over the last few years, investors might question if there is much more room for Apple to grow, which might be a constraint on valuation. Nonetheless, given Apple’s capital strength, it could well be argued that it is still a bargain as investors look for the company to close in on a trillion dollar market capitalization.
Overall, the outlook for Google and Apple is quite positive since both companies have plenty of strategic growth opportunities. They have done a wonderful job of fulfilling the needs and desires of their customer base, while spearheading innovation. As long as they continue to do so, both Google and Apple should continue to deliver strong earnings for shareholders. A word of caution, however: Fortunes can change rather rapidly in the world of technology investing. As such, investors need to be cognizant of possible disruptive forces that could sideswipe these tech giants. Perhaps this is one of the reasons some value-oriented investors have avoided the sector, choosing instead to focus on their circle of competence. But given that technology has become more pervasive in our modern world – infiltrating even the most mundane industries – all investors will need to cultivate a better understanding of the impact of technology going forward.
Garnet O. Powell, MBA, CFA
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