With the technology market fast evolving, many companies are taking up massive diversification programs and venturing into new fields. While such growth is beneficial for companies, it also makes the industry more competitive. The handheld and virtual storage industry peaked with Apple's Appstore, but now has numerous competitors with a variety of shapes, sizes and motives. In this review, I will be taking a look at Apple (AAPL), Google (GOOG), Microsoft (MSFT) and the most recent entrant to be considered a threat - Amazon (AMZN).
Financial and Market Analysis
Here are the four companies for our analysis:
Return on Equity
Estimated Fair Value Range
Upside Potential to Reach a Fair Stock Value
Data from Morningstar on Feb 22, 2013
The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the four competitors, suggests that currently all stocks (except of AMZN) are undervalued. In addition, EFS' fair stock price valuation indicates that currently Apple is trading at the most attractive discount. At a price of $445.85, Aaple is trading at a significant discount. The stock has 115% upside potential to reach its fair value.
On January 23rd, Apple's investors got the unusual news of flat quarterly profits amounting up to $13 billion. Now of course, any other company would handsomely welcome such an amount of quarterly profits, but since it is Apple we are talking about, investors expect the company to continue the same growth rate it experienced when tapping into the iPod, iPhone and iPad market. The company's share price has dropped 7.70% since the announcement of its quarterly results. Financially, Apple is secure due to its strong cash flows, which are further supported by literally zero levels of debt and a high ability of turning over profits. The company boasts strong earnings over the past three years but doubts over its ability to tackle stiff competition from Samsung's Galaxy line remain prevalent. While offering Apple products for lower prices will boost profits, higher costs will be a constant trouble, as seen in the last quarter.
Google has already reached historic highs this year, hitting $806.95 a share on February, 19. The search giant is showing stability in its ad business while its Android products continue to outpace competition repeatedly. The benefit for Google is that there are multiple hardware manufacturers using its software, while its primary rival, Apple, uses only one. The company's earnings have grown rapidly of the last few years and as the internet and computing become even more accessible with smartphones, investors can expect ad revenue to grow even further with time. The company has zero levels of debt while its profiteering model is somewhat straight forward - the more clicks it gets, the more revenue Google generates. It is worth noting that Google does not offer a dividend to its investors.
Microsoft's decision to invest in a multiplatform operating system has not yielded positive results just yet. The company posted a 3.7% decline in net income for its second fiscal quarter; while there has been progress in computers using Windows 8, the revolution has been less than ideal in the case of smartphones and tablets. However, the company has fairly good financial indicators, which show minimum amounts of debt, and the company's cash flow is expected to get a boost once it launches its Office apps for iOS devices. Microsoft's stock offers an attractive dividend yield but its earnings growth is not as attractive as some of its rivals'. Microsoft's stock will continue to look headless unless it witnesses changes in the proving grounds of smartphones and tablets. Talks of Microsoft striking a deal with Dell (DELL) to buy a considerable amount of share in the company seems logical, keeping in mind that Microsoft has been unable to breakthrough the smartphone and tablet market, and its personal computer revenues are ceasing to grow.
Amazon is a company with annual revenue of $61 billion, but posted fourth-quarter sales that were well below investor estimates. Furthermore, this pattern is expected to continue into the next quarter as well. Based on the company's stock market performance, investors seem to have confidence in Amazon's ability to turn profit from its overarching internet-selling umbrella. With the stock having a negative P/E, investors buying a share of the company should be aware that it has been losing money per share of its stock. The company aspires to improve margins over time, as do investors; however, Amazon provides its customers discounts and subsidized shipping whenever it gets a chance. The company's customer-oriented philosophy is what has had investors glued to this stock for so long; however, the question remains as to whether it can truly realize the potential it has.
Make or Break for Investors
With stock prices in the hundreds, Apple, Google and Amazon cannot be considered cheap. In my opinion, none of these are undervalued stocks which one needs to stay away from, as having those in your portfolio will only boost your chances of having a favorable return in the long term.
Microsoft has the advantage of being significantly cheaper than its competitors, which provides it a unique opportunity to be in the lead for once. Microsoft has too many question marks over its ability to challenge Apple and Google in the smartphone and tablet market.
Apple's continuing capability to innovate has to be questioned now that saturation of the industry is fast approaching, and the same is true of Samsung's Galaxy line.
Amazon, on the other hand, has great potential to unlock further price hikes on the stock market. AMZN has been making loss on its earnings in its recent results, but the company's stock price has grown by 41% over the past year - which tells me that AMZN's operating model is currently more focused on expanding its customer base rather than having pretty revenue numbers.
Google, on the other hand, is still expanding significantly, and with its revenue per clicks model continuously growing each year, I don't expect it scale down anytime soon.
In my opinion, a portfolio inclusive of GOOG and AMZN would be a prudent and well-informed decision based on the two companies' strong recent growth and stable revenue generation ability. Furthermore, their ability to fend off the competition is what sets them apart from Microsoft and Apple.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.