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Summary

  • With both Google and Apple having split their stocks it is now time again to re-examine which firm is the better longer term bet.
  • Even though Apple remains strong domestically, international market penetration is greatly behind that of Google.
  • Apple has a massive buy-back and dividend, Google has nothing like that, but does it matter?

It seems that over the past several years Google (NASDAQ:GOOG) / (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL) continue to play the game anything you can do I can do better. Both tech giants have their own way about building and developing their own brand, but as an investor the question of which one is the better investment is something that is always a bit allusive. Below we will examine both firms' fundamentals, products, pipeline, sales growth, and overall long term potential to try and come to an answer on which is the better stock to own.

Apple

Apple announced during its blockbuster second quarter earnings announcement that it planned to split its stock by 7:1 effective June 9th. This split at today's market price ($590) would have the "new" stock price start trading at $84.28 per share. This news comes just a few months after Google split its own stock in what I would consider to be a very creative "stock split". The firm issued class C shares in a 1:1 exchange for the existing A shares. This move effectively cut Google A shares in half or created a 2:1 split.

Apple's stock split should have a net positive effect on the stock. For starters it will make the stock more attractive to retail investors simply because of the effective purchase price being cheaper. Second, it will make the stock more attractive for larger and mid-sized funds to pick up and have as a part of their portfolio. Thirdly, given that the effective price will be less I think there is a good chance that Apple could be added to Dow Jones Industrial Average index. At its new price the weighting would not dramatically affect the Dow's daily price movements on down days for Apple.

Apple for the past several years has been essentially stuck in a bit of rut when it comes to stock performance. The stock which unit recently (post Q2 earnings) had been essentially range bound between the $500 - $540 level. Apple's problems seemed to stem from its own success and extremely high margins and street expectations. Every time the firm met or slightly exceeded expectations the street was always hoping for more, resulting in a sell-off.

What Apple CEO Tim Cook has done right is recognizing that his company is no longer a high flying growth company, but instead has matured into a slow moving value company. To help fuel this change Cook has implemented an extremely aggressive stock buyback program totaling $90 billion utilizing the firms massive cash hoard ($150.5 billion) and has established a reasonable dividend policy. The buyback thus far has brought total Apple shares outstanding down from 940 million back in March of 2013 to 861 million in March of 2014.

The brilliance in the buyback is that Cook is smart enough to make the buyback very targeted. Meaning that when the stock price is irrationally depressed the buyback is accelerated to take advantage of the mispricing, this has led to the stock having a bit of a floor price put in at the $500 level. Read my article "Tim Cook's Floor Price in Apple" for more on this.

Aside from the shareholder friendly actions that the firm is taking to try and increase share price, Apple is also rumored to be releasing a lot of new products later this year. These products range from the new iPhone 6 which is rumored to have two versions one with the standard screen and one with a larger screen. There are also rumors that an iWatch will finally hit the market and a new upgraded version of Apple TV (iTV). Additionally, standard upgrades to the iPad, iPad mini, and Macbooks are also expected. Again this all speculation and whether all of these new products will actually hit the market this year or not is yet to be seen.

I would be remiss for not mentioning Apple's very recent purchase of Beats by Dre for an estimated $3.2 billion. The Beats platform includes a premium headphone and streaming music service. How Apple plans to use that or further monetize the platform I do not know. Perhaps the outcome of this acquisition could be the next big thing that we don't even know about yet. I on the other hand don't quite see it and feel that the overall value coming from this acquisition is virtually zero, but I have been wrong before.

If all of the above mentioned products where to hit the market it is very difficult to determine the overall financial impact that they would have on the firm and the stock. Especially since several of these products already exist from some of Apple competitors and nothing of the above mentioned products is slated to be a major market disruptor, like the iPhone or iPad originally were.

I would say the major unknown and potential game changer is Apple revenues is its continued footprint in China, especially with mobile phone carrier China Mobile (NYSE:CHL). This is an area where Apple should continue to gain market share and help the firm deliver better than expected earnings for several quarters to come.

Google

Google is a very interesting tech play in that it essentially has its figures in everything. Contrary to Apple, the search engine giant has a huge product lineup. The products range from driverless cars, mobile operating systems, TVs, web browsers, cloud backup, online software, tablets, phones, computerized glasses (Google Glass), search engines, and space exploration to name just a few.

Even though Google has a lot of irons in the fire, it does have some very clear winners. Google's Chrome web browser has been surging in popularity and is now the world's number 1 web browser as of July last year. Chrome, which was originally laughed at when it was launched into an already heavily saturated market for web browsers has taken the lead and set the bar for what consumers demand from a web browser. Chrome was the first of its kind to blow competitors out of the water with speed, security, cloud capabilities, and user interface. Like everything with Google, it was designed to be an open sourced platform so that it could forever be improving upon itself.

Google also is moving very aggressively in the laptop/notebook space with its new Chromebooks. Google's Chromebook (similar to most of its products) are made by a lot of different firms. Currently Chromebooks can be found being made by Dell, Hewlett-Packard (NYSE:HPQ), Acer (OTC:ASIYF), Samsung (OTC:SSNLF) and Lenovo (OTCPK:LNVGY).

Google's play here with the Chromebook is different from Apple in that Google is hoping to capitalize on end users running more Google sponsored searches or buy more music/apps via Google Play. Additionally, Google is hoping that users of Chromebooks will adopt the firm's web based apps that rival competitor Microsoft's (NASDAQ:MSFT) Word, Excel, PowerPoint, and Exchange. Again to keep with the Google trend these applications are free, another major selling point for end users in comparison to Microsoft. At the end of 2013 Chromebooks accounted for 21% of all U.S. notebooks sold.

Google's plan to make its mobile OS Android sync with its Chromebook is very similar to the design platform of Apple, but the difference is that with Chrome and Android the end consumer is not limited to the type of product(s) that they own to run Android or Chrome.

Aside from Google's clear product winners, the firm is also hoping to penetrate a market that all major tech companies are hoping to get more involved in, your living room. Apple has Apple TV (soon iTV), Amazon (NASDAQ:AMZN) has Prime and Roku, Netflix (NASDAQ:NFLX) has its streaming service, Microsoft has Xbox One, and now Google too is involved with Chromecast. Given how new participates are to this market it is still too difficult to call a true winner. One thing is for sure given the track record of both Google and Apple I would bet that one of them will ultimately be the ultimate disruptor in this market.

One of the starkest differences between Google stock and Apple stock is the way in which shareholders are rewarded for their ownership. With Apple shareholders have a buyback and dividend to work with alongside new product development. Contrast that with Google whose shareholders only have product development to drive share price higher. Google has long stood by the notion that it could do more with its large cash hoard ($61.5 billion) through acquisitions or R&D then by simply giving it back to shareholders. That philosophy is what has kept Google shares performing more as a growth stock and less like that of a value stock.

Comparison

Aside from the many differences that both of these firms have there are also a lot of similarities that are shared by both firms. It is those similarities in market penetration and product line that make it hard for investors to really determine which one of these firms is the right one to own. Below is a chart that compares both firms fundamentals compared to the industry average with the preferred firm (winner) being identified to the right of the table.

Google

Apple

Preference

P/E

28.40

14.19

Apple

Net Profit Margin

20.42%

21.67%

Apple

Operating Margin

23.34%

28.67%

Apple

Total Debt

$3.23B

$16.96B

Google

Gross Margin

61.32%

39.31%

Google

EPS

$18.83

$41.85

Apple

FCF

$19.42B

$53.94B

Apple

Price to Book

3.98

4.26

Google

Price to Cash

5.91

3.39

Apple

Return on Equity

14.76%

29.50%

Apple

TOTAL

3

7

After examining the above metrics it is clear that from a fundamental standpoint Apple is the obvious choice from a valuation standpoint to own over Google. What is not as clear is with both firms having a product pipeline that is basically full, which one is more likely to continue to deliver above average returns? Below are several tables that highlight sales, revenue, and annual growth rates for both Apple and Google's products to help shed some light on these trends.

Apple

iPhones

iPads

Mac

Current Year

Annual Sales Growth

Current Year

Annual Sales Growth

Current Year

Annual Sales Growth

Unit Sales

159.78M

15.65%

71.08M

-3.27%

17.30M

2.06%

Revenue

$96.22B

11.78%

31.64B

-10.44%

$22.43B

-0.35%

Google

Android Phone

Chromebooks

Unit Sales

% of Market

Units Sold

Market Share %

2013

1,416.6M

78.40%

1,760,000

21.00%

2012

1,159.46M

66.40%

400,000

3.60%

Tablet/iPad Sales Expectations

2013

2014 / Growth

2015 / Growth

iOS

241.4M

286.4M / 18.64%

324.5M / 13.3%

Android

879.8M

1,171.0M / 33.01%

1,358.3M / 16%

It should come as no surprise that Apple's iPhone is still its main bread and butter from a growth and revenue standpoint. The company even admits this and highlights that the phone is what drives majority of its revenue. That is fine for now, but unless the company continues to develop its current product line or comes up with a new market disruptor I think the writing is on the wall that Google is going to continue to take market share from the firm leading to continued disappointment in the quarters/years ahead for Apple. The operating system chart below I think is the most telling of where the market is heading for these two firms.

Operating System

Market Share

12 Month Growth

Apple

15.60%

-3.5%

Google

78.40%

12.00%

Overall, Apple fundamentally seems to be priced as the better value buy, but is it really that good of a deal? Given the slow and steady decline in market share and its heavy dependence on iPhone sales to help drive revenue growth, I would argue that Apple is already fairly priced given the limited upward potential that the company has. Again I (nor anyone else outside of Apple) know for sure what the firm has planned next and all we can do is take Tim Cook's word that their new products will be major revenue generators. That type of investing leads to speculation and high expectations around revenue growth, new product timelines, and overall market penetration, which all inevitably leads to the firm missing those expectations resulting in further downward pressure.

On the other hand there is Google, a firm that has demonstrated consistent growth and increased market penetration in all of the same areas that Apple is currently involved in. Additionally, Google understands that innovation is key to its success and that in order to do that you need to cast a wide net, knowing that some of the products will fail, but in the long run you will have more winners than losers. Additionally, Google's model is predicated on it be very forthright and open on new products, timelines, and potential revenue generation. That is a business model that I can get behind and invest in.

Don't get me wrong I have been an on again off again Apple shareholder and Apple products user. As of late the firm's continued earnings roller coaster that I have experienced and the patience/disappointment that must be endured in waiting for a new product that shareholders 'hope' will be the next big thing, just isn't what I am interested in doing anymore.

After examining all of the facts, I think Google is better choice for the long term investor and is the more consistent and predicable firm to get behind.

Source: Google Or Apple: Which Is The Better Long Term Bet?