By Morgan Smith
March 7 was a big day for Apple (AAPL). The company unveiled an updated Apple TV, made its personal assistant software Siri available in Japan, and released its newest iPad. Here are some of the key details of the "new iPad" - as yet the name has not been revealed. The changes are relatively modest - mostly related to 4G capability and a higher definition screen - although there are a few that will generate some interest, like built-in dictation and a 5 megapixel camera. The company will continue to sell its iPad 2, dropping the price point by $100 (from $499 to $399 for a basic model).
Small changes have, in the past, been enough to entice sales - as it stands, there have been 15.4 million iPads shipped easily beating out competitors HP (HPQ) and Dell (DELL) amongst others. Tim Cook, Apple's CEO, explains the trend by saying that the iPad offers a completely different experience for users. To demonstrate, he compared the way Twitter looks on a Samsung tablet to the way the application looks on a smart phone, only bigger. On an iPad, the experience is completely different. "This is a key reason why momentum on iPad continues to build and the competitive tablets aren't gaining traction," said Cook.
Netflix (NFLX) is also in an interesting place right now. It announced on March 7 that customers can now sign up for Netflix directly from Apple TV and have the ability to pay via their iTunes accounts. Netflix announced the news on its corporate blog, reportedly just minutes after Apple's press conference wrapped up around lunchtime. Netflix also announced that it would be able to offer its movies and shows in 1080p HD on the new Apple TVs. Time will tell whether the news will help Netflix.
But, Wall Street didn't seem convinced.
The company has been flailing a bit lately after losing the ability to stream Starz movies and filling the void with television shows, but the news of its involvement with apple did help pare some of its loses. "Netflix, down 4.3% at the time of the announcement, pared its loss to 1.3% within minutes," reports the Wall Street Journal. "It's since slipped a bit more, and remains the second-biggest decliner on the S&P 500." Netflix closed trading on March 7 at $105.19 a share after opening at $111.25 a share. It fell as low as $102.53 before its announcement. I'm keeping an eye on this stock.
Apple didn't fare much better. It opened the day at $536.76 a share, up from $530.26 when the market closed the day before. By 4 pm EST, Apple had sunk nearly as low, trading at just $530.69 a share. At the same time, its mean one-year target estimate is at $575.23, down over $25 from what it was a few weeks ago. The company is still priced low relative to its future earnings, with a forward price-to-earnings ratio of 11.17, but that is assuming that its earnings will increase by the average of 19.30% a year over the next five years analysts are predicting. Its industry is expected to grow by just 13.32%.
I'm not saying that Apple is a bad company. It has impressive revenue growth, no debt to speak of and a quick ratio of 1.35 - so short-term cash needs should not be an issue. Apple's return on equity is growing, which is a good sign that the company remains strong, and I think Apple's stock price will continue to move higher - the only question is by how much? Over the last year, Apple's stock has gone up roughly 50%. I don't see that sort of growth going forward. In fact, I am inclined to agree with the one-year target estimate and say that investors buying into Apple now will experience a return between 8-9% - which is really kind of low for its industry.
To me, Apple right now is better as a long-term bet. I do believe in what Apple calls the "post-PC revolution" - more and more customers are choosing Apple for its dependability and its intuitive user interface, not to mention some of its innovative features, like built-in dictation and screens with resolutions so high that they leave HD in the dust. I am just not sure that investors will experience the shorter term gains that many are looking for by buying into Apple. It is going to take something pretty revolutionary to see those kinds of returns (10% or better a year).
The problem is that most of Apple's customers are coming from Microsoft (MSFT) and Research in Motion (RIMM) - they are switching from BlackBerrys to iPhones or using Mac software over the Microsoft suite. In the mean time, many new users (smartphone and tablets alike) are opting for products using Google (GOOG)'s Android software because they are less expensive and carried by a larger number of providers.
I think Google's share price and analyst estimates reflect this. Google was trading for over $606 Wednesday on a mean one-year target estimate of over $706. If analysts are right, this translates into a return of 16.5% over the next 12 months. Google is also priced almost as low as Apple, with a forward price to earnings ratio of 12.19, and has earnings growth estimates of over 18% per annum on average over the next five years - only marginally less than Apple's.
I realize the two are in different industries, generally speaking, overlapping in only a few key areas, but I say that earnings increases are earnings increases and expected growth is expected growth. For my money, in this sector, if I were looking for a shorter term return (1-2 years), I'd put my money on Google.
There are lots of reasons to be optimistic about Google. It has a debt to equity ratio of 0.07, which is higher than its industry's average but still exceptionally low. Moreover, the company has a quick ratio of 5.70, indicating that it has more cash available to cover short term needs than many of its competitors. The company has also demonstrated a pattern of solid earnings growth over the last two years, in spite of a couple failed ventures like Google Wave and Google Buzz. In fact, its revenue growth of 25.4% is outpacing the industry average of 24.6%. The company's net operating cash flow has also been on the rise, jumping 11.28% compared to the same quarter last year versus an industry average cash flow growth rate of 10.46%.
Plus, Google also launched a new service called Google Play (on March 7, as a matter of fact). Actually it is more of a rebranding, but under this banner Google will offer all of its digital media services under one proverbial roof. The move is meant to avoid excluding users who would see the Android Market name and assume that the media was only for Android users. In fact, the way Google works, any movies, music or ebooks it offers does not require an Android device. Instead, all that content is stored in Google's cloud and accessible from just about any web browser - that's the point of rebranding everything under the Google Play name. I think it is a smart move.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.