Google, Apple, Research in Motion and Amazon: Are "The Four Horsemen" Overvalued?

I think some markets are in a frenzy. They include oil, China, the Canadian dollar, Brazil, fertilizer shares, and the stocks known as "The Four Horsemen." These stocks are Google (GOOG), Apple (AAPL), Research in Motion (RIMM), and Amazon (AMZN).

"The Four Horsemen" may be in a frenzy, but are they overvalued?

Now, full disclosure, I'm a value guy. I tend not to dabble in this area. But I am not so skeptical as to anoint all high growth stocks as "overvalued" as some value managers do. They are not. Some are perfectly reasonable if not undervalued given their growth prospects.

So are "The Four Horsemen" reasonably valued given their growth prospects?

First, let's look at the charts. The four have been horses over the past 12 months.

Google

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Apple

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Research in Motion

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Amazon

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Next, let's look at projected earnings growth. GAAP estimates for the four over the following years are

GOOG
2007 - $13.34
2008 - $18.01
2010 - $29.81

AAPL
2007 - $4.04
2008 - $4.73
2010 - $7.46

RIMM
2007 - $2.17
2008 - $3.27
2010 - $3.95

AMZN
2007 - $1.11
2008 - $1.62
2010 - $3.36

I use GAAP estimates, and not estimates less expenses-companies-don't-want-you-to-see.

The compounded annualized growth rates from 2007 through 2010 are:

GOOG - 31%
AAPL - 23%
RIMM - 22%
AMZN - 45%

On Thursday, the closing price for each stock was:

GOOG - $703
AAPL - $187
RIMM - $122
AMZN - $88

The price/earnings ratio on 2008 GAAP estimates are:

GOOG - 39x
AAPL - 40x
RIMM - 37x
AMZN - 54x

Growth money managers often compare the rate of growth to the P/E multiple to determine if they are paying a fair price for the stock's growth. This is known as the P/E to growth, or "PEG" ratio. For example, if a company is growing at a rate of 20% per year and has a 20 P/E multiple, the PEG ratio is 1. If the company has a growth rate of 20% and a P/E multiple of 40, the PEG ratio is 2. The general rule of thumb is if a stock has a PEG ratio of 1 or less, it is cheap. If it has a PEG ratio of 2 or more, it is expensive.

Given the above figures, what are the PEG ratios of each stock?

GOOG - 31%
AAPL - 23%
RIMM - 22%
AMZN - 45%

It appears that the stocks are not expensive given the levels of growth.

If you use a PEG of 2 (with the exception of Amazon which is coming off a low base, and thus a target PEG of 1 assigned), what is the upside from current levels?

GOOG - $1,107, 57%
AAPL - $214, 14%
RIMM - $144, 18%
AMZN - $73, -17%

The question the skeptical value manager asks is whether or not the growth rates are real. The growth manager would counter that earnings estimates continue to rise and growth may, in fact, be higher. Over the past 12 months, for example, estimates for the four have risen by 50% to over 100%.

Now, I'm not saying you should run out and buy these stocks tomorrow - I own none of them. Nor have I deeply researched any of these stocks. However, given the defined parameters, the stocks have room to run.

Comments

[Julian Ivan...:]

Laughably low estimates for AAPL in 2008 are responsible for skewing the AAPL numbers. AAPL will earn approx $6 - 6.50 in 2008, not $4+. The smart money knows this, which is why it is letting the stock run up even while most of the blow hard analysts fail to get their collective heads around the impact of iPhone subscriber revenue sharing with the carriers and the $1-2+ on earnings this offers.

AAPL is actually the most undervalued of the lot, relatively, rather than the most expensive.

2007 Nov 02 07:35 AM

[PK de C'ville:]

Toro,

What happens to aapl's earnings if the iPhone rollout exceeds the iPod juggernaut? Your consensus estimates for 08 and 10 do not include the growing understanding that aapl will ship 40+ million iPhones in 2009 with 60+ mil to follow in 2010!

And with each iPhone subscriber, we have new estimates that PROFIT per subscriber will be near $216/yr!

I adjust your projected earnings growth numbers to:

2008 - $4.73 ===> 6.00
2010 - $7.46 ===> 12.00

Although the iPhone may not prove the juggernaut some think it will be, the impact on the bottom line is incredible, yes?

The prudent investor would run the numbers under two scenarios: juggernaut vs "also ran" AND then watch iPhone developments VERY closely.

2007 Nov 02 10:41 AM

[Hayweed:]

If Apple sells 13 miliions phones in 2008 (about what Rimm shipped in 2007) and then sells 40 million in 2009, where does this leave Rimm. Apple was in the computer business now they are music, video, computers, phone, mp3 players. Rimm is in phones. Google is a marketing company on the internet that wants into the phone biz. MSFt wants in the phone biz. Dell are they going into the phone biz? Seems like a crowded space. As Apple and Google are diversified they can ride the phone business and it will have some impact. Rimm is only in phones so if they guess wrong they will get killed. Motorola and Palm were big in phones and then got it wrong.

Lastly, If Rimm's expertise is a keyboard phone that does email better than everyone, isn't every phone going to do email soon. Is MSFT going to do push email. How about Google. How is Rimm's position defensible?

AMZN is a dog that gets sales by allowing people to avoid sales tax. Go to BBY or Circuit City and ask them to match AMZN and eat the sales tax. They can't do it. When the states/feds take this away, the consumer will go to.

2007 Nov 02 02:56 PM

[drb:]

Hmmmmm..... From my point of view. Let's look into the crystal ball for a moment based on past performances of the Apple product line.

1. Apple introduced the iPhone and is selling at a brisk rate, increasing sales, adding markets in other countries soon. Also, I am sure additional product launches will be made. When? I am sure they'll announce another version in the next. It's only logical.
2. Desktop/Laptop sales are increasing.
3. Leopard is flying off the shelves at a brisk rate and they have a larger install base for potential upgraders. Some people are switching or choosing the Mac platform which is helping increase market share.
4. iPods just got an overhaul, and I am sure they'll have another overhaul next year some time.
5. Other software announcements? I don't think a year has gone by without some sort of upgrade and/or new software offering. iWork seems to be a very inexpensive alternative for Office for those that don't need to spend the money on Office. iLife has a decent upgrade which will probably continue to sell to the current install base. Another versions of one or both? Maybe.

I think based on the potential markets opening up, my crystal ball says Buy Apple.... Unless something happens beyond Apple's control. I think the upside might be in the 250+ range for next year. Still too soon for me to predict anything more than that. But that's just me.....

2007 Nov 02 04:25 PM

[Sublime9:]

They are no longer the four horseman. Cramer announced that a week or two ago. As of this week, he only recommends buying Google. He wants a pullback on the others.

2007 Nov 02 05:28 PM

[puffy:]

No he just cut amazon. he still calls the other 3 Horseman

2007 Nov 03 08:45 PM

[Sublime9:]

Crammer broke up the four hoursemen a week or two ago. Currently, he only wants people to buy Google. He is waiting for a pullback on the others.

2007 Nov 02 05:31 PM

[Sublime9:]

oops

2007 Nov 02 05:33 PM

[Sublime9:]

oops. Thought it didn't post the first time around.

2007 Nov 02 05:33 PM

[User 114285:]

Dave wrote a similar commentary here: www.etfdigest.com/dave...

2007 Nov 02 05:36 PM

[Tom B:]

I don't think you acount for AMZN's low margins, or RIMM's increasingly tenuous business model (who's gonna buy a Blackberry when then can buy an iPhone? Loyalists for a year or two, but then what?).

Also, as others have stated. New Apple products will be a driver for Apple (iPhone, Leopard, Server sales maybe (?)-- Leopard is 64 bit; MSFT does not have a GOOD 64 bit solution).

Google has the germ of a "post-serach" business plan-- the "open social"-- though a dumb MSFT-like name, is likely to be HUGE.

2007 Nov 03 09:16 AM