Analyzing Google vs. Apple

Alec is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As great as Apple's (NASDAQ: AAPL) growth potential is, Google (NASDAQ: GOOG) may offer even greater growth in the long term. But in the short term, Apple could be the better buy. Here's why.

The Apple business model is to innovate great products that consumers love to use. Its top sellers include the iPhone, iPad, and MacBook laptops. Apple invests its time and energy into creating new products that people will buy.

Google, on the other hand, has a somewhat larger business model. It can create revenue from so much more than just its products. Google can profit from search, the Android OS, its new Chromebook platform, and so much more. People haven’t even considered the benefits of Google’s influence on driverless cars, possible retail locations, Google Glasses, and Google Fiber in Kansas City.

Apple’s growth potential is still pretty big, because it can still create new products (like the iWatch and iTV). But Google has its fingers in so much more than Apple does.

Taking a bite out of Apple

Analysts are expecting 15% growth in Apple’s earnings over the next five years. Its current EPS is $44.10, so growing that by 15% over the next five years results in a future EPS of $88.70. Multiplying this by a historical average PE of 15, we get a future share price of $1330.50. This represents about a 24% return on the current share price of around $450.00.

So buying Apple today will lead to approximately a 24% annualized return on investment five years from now, if the analysts’ predictions are correct.

Goggling at Google

Analysts are expecting 16% growth for Google’s earnings for the next five years. Google’s current EPS is $32.32, resulting in a future EPS of $67.88. Multiplying the historical average PE of 23, the future share price should be $1561.31. This represents about a return of just over 14% on the current share price of around $800.

So buying Google today will lead to approximately a 14% annualized return on investment five years from now, if the analysts’ predictions are correct.

The Bottom Line:

Right now, buying Apple will likely result in a better return than investing in Google, simply because of the price and expected growth rates. So like I said earlier, in the next 5 years, Apple might make a better choice. However, over the next decade or more, Google’s reach in so many different areas of our lives will likely leave it better able to profit from more than just its basic phone/laptop/tablet consumer products. 

aleceiber owns shares of Apple. Visit his website at The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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