Valuations Of The 4 Most Innovative Technology Firms

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Includes: AAPL, GOOG, IBM, MSFT
by: Louis Rhéaume

According to Bloomberg and Booz & Co, the 4 most innovative technology firms are:

  1. Apple (NASDAQ:AAPL)
  2. Google (NASDAQ:GOOG)
  3. Microsoft (NASDAQ:MSFT)
  4. IBM

In their 2011 Global innovation 1000 survey, Booz & Co report that it is not necessarily the big spenders in Research and development in percentage of sales that are the best innovators. Instead, having a strong culture that supports innovation and strategic alignment between the innovation strategy and the global corporate strategy is more important than total spending in R&D. For instance, Apple’s rank in R&D/sales (2.7%) is just 70, but the firm is the most innovative one, according to a survey of 600 senior managers.

What is the stock performance of these 4 best tech innovators?

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Over the past 5 years, Apple has the best performance with 400%, followed by IBM at 100%. Google obtained 27%, while Microsoft's performance was around 0%. Microsoft is a big spender in R&D/Sales, and is ranked 4th in the survey. However, MSFT created few shareholders’ value in the past 5 years.

What are the valuations of the top 4?

Analysts opinion: (1 is Strong buy and 5 is Strong sell)

Apple 1.7

IBM 2.3

Google 1.8

Microsoft 2.0

Financials

Apple

IBM

Google

Microsoft

Profit margin (TTM)

23.95%

14.68%

26.78%

33.01%

Operating margin (TTM)

31.22%

20.21%

32.76%

38.78%

ROA (TTM)

22.05%

12.38%

11.96%

17.33%

ROE (TTM)

41.67%

69.84%

19.52%

44.16%

Revenue(TTM)

108.25B

106.45B

35.76B

71.12B

EBITDA (TTM)

35.60B

26.38B

13.45B

30.15B

Total Cash (MRQ)

25.95B

11.33B

42.56B

55.94B

Total Debt/Equity

0

134.78

13.24

22.05

Levered Free cash flow

19.75B

12.69B

3.65B

14.90B

Trailing P/E (TTM)

14.47

14.6

20.27

9.47

PEG (5 years expected)

0.57

1.20

0.84

0.84

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Source: Yahoo Finance

I was concerned about the high valuation of Apple. It is only surpassed by Exxon Mobil (NYSE:XOM) 372.09B vs. 372.32B. However, considering the low PEG ratio of Apple, the low trailing P/E, no debt, high levered free cash flow and very high ROA and ROE, cash per share at 27.93, it still has attractive valuations. The key here are expectations. Analysts are predicting a strong portfolio of innovations projects such as Apple TV in 2012 and the Siri voice recognition killer app in smartphones. The CEO is also proud of the mix of its innovation pipeline forthcoming. Steve Jobs is gone but the innovation culture and innovation execution of Apple are the keys, whether the firm can continue its fast growth in revenue and shareholder’s value creation. Tim Cook may make mistakes, but the organizational structure and the intangibles of Apple are very strong. The innovation strategy is tightly aligned with the global strategy. Among the 4 best tech innovators, I pick Apple as the best potential stock performer in the next 5 years, with Google second, third IBM (with a lot of debt) and Microsoft fourth.

As mentioned in some of my previous articles, Google is a horizontal integrator involved in all of the infocom sectors and an important infomediation player. Its innovation strategy in mobile commerce is starting to be important (See figure below). These new products and services are reinforcing Google’s mobile commerce model and they are all intertwined.

Google’s mobile commerce strategy

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IBM has a lot of debt but an impressive portfolio of patents. IBM has so many patents that it is selling non-used patents in exchange of royalties, and is making billions of dollars directly on the bottom line just in patent royalties.

Finally, Microsoft has plenty of liquidity, but is making few profits outside the operating system and the office suite. While Skype’s acquisition may help, its innovation strategy is not as appealing as Apple, Google or IBM.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.

Additional disclosure: I am long XOM