Comparing Apples To Oranges

by: Stephen Rosenman

Large cap technology companies are hard to compare. Those selling software usually have giant margins while hardware companies tend to have weaker margins. Some experience revenue growth. Others have great cash flow. How do you compare Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG), IBM (NYSE:IBM), Qualcomm (NASDAQ:QCOM), and Microsoft (NASDAQ:MSFT)? No one metric works well to measure them against each other. The tool box analysts use just doesn't seem up to the task.

My answer: Stack the metrics up. Those weak on one metric will make up for it on another. The best will shine through. The metrics I'll use are gauge the relative strengths across a wide set of parameters. They include measures to test efficiency, cash flow, growth, and profitability:

1. Inventory Turnover

2. Free cash/Sales%

3. 3-Year-Average Revenue Growth

4. Operating Margin

Let the competition begin:

Apple outshines its peers with a whopping 173 points based on the four metrics. Microsoft comes in second with 96, Qualcomm second 86, Google 80, IBM 56, and Amazon trailing with a humbling 51 points.

(You'll note Google doesn't have any inventory -- a little mean of me, but it's my article -- you can spot the company some points if you like.)

Apple towers over the group: It kills on revenue growth and inventory turnovers and holds its own when it comes to free cash and operating margins.

Next Up: How To Value The Companies
When it comes to valuing the companies, what do you use? PE? Price/Sales? Price/Book? Price/Cash Flow? Let's use them all. Stack them up and see which is the most beloved of all.

Clearly Amazon is the dearly beloved, valued at a Price/Everything of 162. Microsoft is the least desired at a miserable 28. Apple is a stark 35.

The Take-Away Message:

The companies with the strongest metrics are least valued and the company with the weakest metrics is most valued. And people say the market is rational!

The Final Exercise:

So, which stock is the bargain? I'll compare the ratio of stacked metrics/stacked value to uncover true value. In this case, the higher the ratio, the more undervalued the company is. Here goes:

Despite its strong run, Apple is profoundly undervalued compared to its cohort.

Who says you can't compare Apple to oranges?

Disclosure: I am long AAPL.

Additional disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.