Don't Confuse Bits & Bytes with Dollars & Cents

By BA McKenna - July 24, 2012 | Tickers: AAPL, GOOG, MSFT | 0 Comments

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Are you an Apple (NASDAQ: AAPL) devotee? Can't stand Apple, it's Google (NASDAQ: GOOG) and Android all the way? Perhaps Microsoft (NASDAQ: MSFT) floats your tech boat?

Perhaps, like me, you read a good number of stock market focused articles on tech companies, especially the ones I named above. Perhaps you also read a decent number of articles on the same companies, but on tech-focused outlets. While a respectful debate is a good thing, have you noticed that the debates on both types of outlets often appear the same?

Will the OSs Take Their Corners, Please!

While a "my OS is better than your OS" debate is on target for tech sites, and certainly adds tremendously to the discussion on financial sites, it can also miss the point. It seems to me that some readers (not my readers!) and financial writers -- as per my title -- confuse bits and bytes with dollars and cents. This can hurt their pocket, if they invest in stocks.

The Opponent is Often More Yourself than That "Other" OS (or other tech)

A few points to keep in mind to avoid this error:

1. The 'best' technology (for anything, not just operating systems) does not necessarily make for the best stock market investment.
2. The 'best' is usually relative -- You may need your gadget to do XY&Z, whereas others (perhaps most others) have no use for X&Y, they just want half your Z's ability plus A.
3. In consumer tech, ease of use, customer service, the "delight factor," and -- for some (though they'd likely not admit it, if they're even aware of it) -- the cache factor matter just as much as the tech. 
4. You vote for the best tech or gadget with your product-purchasing dollars; tech outlets vote for the best tech with 'expert' votes; the stock market votes for best investments with the ticker tape.
5. You are not the market -- the majority is the market.
6. The stock market is not "wrong" over the long-term -- it just 'is.'
7. Repeat #1...and again.

As to point #3, Apple currently owns the customer service and delight factors. I think it owns the user interface/ease of use piece, too, but we'll leave that out as there is some room for debate.

(I think it's important to note that I'm not an Apple rah-rah. In fact, I've been a long-time PC user because I've worked in business environments. Using it is second-hand, and it gets the job done -- that's what I want from a primarily work tool -- so I have no plans to change course. Non-work gadgets are another story -- and I think I'm in good company with this thought.)

Apple Owns Customer Service

People love Apple's retail stores. Not only are they dealing with actual Apple employees, they are treated wonderfully (how often does this happen anywhere?).

People think of those Apple stores as their friendly personal tech assistant, of sorts -- like a live Siri. One great experience in an Apple store = likely lifetime customer. And then there's the word-of-mouth factor, which is huge.

Apple Owns the "Delight Factor"

Results of customer survey after survey attest to this point. I include one customer survey result (tablets) in my recent article, highlighting one of what I view as the three core reasons Apple has dominated its markets, but there are a ton of them out there.  

The Motley Fool's Evan Niu recently wrote an article which nicely (with a simple diagram) lays out the differences in how Apple and Microsoft view their software strategies. It's a good read, as were the comments. Here's a comment on point here:

"Just this morning I found myself thanking him (Steve Jobs) once again for how he changed my world from one of tedium to one of enjoyment." 

"The Main Thing is to Keep the Main Thing the Main Thing" -- Steven Covey  

Google's Android may very well be "better" (however one defines it) than Apple's iOS. But Apple's been, by far, the better (no quotations on this word) stock investment -- not only over the past 1-year, but also the past 5-years, and as far back as we can go (to Google's 2004 IPO). Google had a great run from 2004 through 2008, but the stock has gone nowhere since.

As for Microsoft's stock, not only has it gone nowhere in 5 years, it's still down about 50% from its late 1999 peak. It's now trading at the same level as it was in early 1998 before the dot-com bubble spike. Again, it could have "wonderful" tech, but it's been a go-nowhere stock for a long time. But as with Google, that doesn't mean it's not going anywhere in the future. On, that note, let's take a quick look at where we are now...

Select Stats

Microsoft and Google reported quarterly results last week, so the above numbers are very current. Apple reports this week. Granted, we're only looking at quarterly results here, but this isn't meant to be a complete analysis, just a quick look at key numbers. 

As to basic valuation metrics, I prefer forward P/Es over trailing and, especially, PEGs (Price-to-Earnings/Growth) since there is context (the growth) to PEGs. Price-to-Free Cash Flow is a great metric because as Foolish investors know FCFs are "real," not subject to accounting practices and shenanigans that can affect earnings. 

Profit margin and ROE are critical metrics. Shrinking profit margins over time or profit margins smaller than competitors' are usually warning signs (if they're not a "one off" type thing) that a company is losing its competitive advantage.

*This excludes a one-time charge -- a $6.19 billion accounting charge to write down the diminished value of its 2007 acquisition of aQuantive.

What stands out in the chart?

Notably, GOOG's and MSFT's shrinking margins, and Apple's expanding margin. A shrinking margin on a quarterly basis may be explainable as a one-off thing. So it might not be a "bad" sign, however, it is never a good sign. 

GOOG's top-line growth was certainly solid, but I'd be looking carefully at its margin situation over the next couple quarters. MSFT needs some top-line, let alone bottom-line, growth.  

Apple's ROE is stand-out. ROE can be a misleading stat as it is affected by a company's debt leverage. So Debt/Equity needs to be checked, too. AAPL has no long-term debt; GOOG has very little; and MSFT has a 0.3 D/E. This explains most of MSFT's ROE advantage over GOOG.  

The above numbers -- while not the entire story, of course -- speak for themselves. AAPL is the standout; GOOG looks promising if its margins situation proves to be a one- (or two-) off thing; MSFT needs to show investors some good numbers soon.

Bottom Line

It's easy to have a soft spot for a company because we personally favor their tech, gadgets and gizmos (or any product, but this seems to occur more often when consumer-related tech is concerned) -- and favoring a company's tech is a great way to identify "potentially" good investments, but it in and of itself is far from enough to make that company a good investment.

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