Two Tech Giants: The Market Got it Wrong

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

At this point everyone should be fully aware that Apple (NASDAQ: AAPL) has fallen 10% since reporting its fourth quarter earnings. In the meantime Google (NASDAQ: GOOG) has traded higher by 5% after its quarterly report. This reaction implies that Google had posted a better quarter, was cheaper, had lower expectations, or that there was some other reason that could justify such a distinction in performance. But the truth is to the contrary and upon reviewing the fundamentals it is clear to see that the market got it all wrong.

Let’s look at this from a completely logical perspective. My goal is to not let emotion get in the way of reason, and to just look at performance compared to fundamentals. The problem with taking emotion out of the equation is that to effectively explain Apple's and Google’s reaction following earnings you must acknowledge that the reactions were 100% emotion based, because fundamentally they make no sense. For example, Google saw 5% profit growth and traded higher by 5%. On the other hand, Apple grew its profit by 13.5% yet lost 10% of its value.

To dig deeper into the reaction we must first question the performance and determine how we can logically explain the performance of Apple compared to Google. Perhaps the performance was a result of valuation? Well, Google trades at about 12 times next year’s earnings while Apple is trading at 7 times next year’s earnings minus cash. Therefore, we can’t say that the reaction was a result of valuation; so maybe the reaction was due to a fear of slowed growth? But actually, Apple is expected to grow by at least 20% in 2013, as a minimum, and possibly as much as 30% making it the fastest growing large cap stock.

Upon looking at the fundamentals and comparing the valuation, I cannot find one logical way to explain the reaction of Apple, compared to that of Google after earnings were announced. Google did grow revenue by 39% while Apple’s was just 18% year-over-year, however Google’s revenue growth was much related to its acquisition of Motorola Mobility, it wasn’t the company’s core business that produced growth. Therefore, it seems logical that investors would view this as a negative, and possibly dig deeper to determine that Google’s growth is misleading and that it’s continuing to experience weakness in data usage of its Android OS, compared to that of Apple’s iOS.

Like I said, I cannot find one “logical” reason that Apple would have declined 10% while Google rose 5% following this last quarter alone. Apple is the cheaper stock, it has more cash, and it posted the better quarter. Also, Apple pays a dividend while Google doesn’t return large amounts of capital to its shareholders. Therefore, my conclusion for Apple is that its fall is more related to perception, rather than fundamentals/valuation.

While saying that Apple’s fall was due to technicals or was a perception related event (meaning too high of expectations) I have to believe that it is close to reaching a bottom. Think about it, where is there another company in the market with 20-30% growth; mid-single digit P/E ratio for 2013; upcoming catalysts such as China Mobile, Apple TV, and new product launches; and then with more than 30% of its market cap being cash? Where else can you find value such as this in the market and at what point do expectations begin to diminish when a company has lost more than $250 from its price-per-share in the last four months? My answer is that you cannot and that there is no way to logically explain Apple’s 10% loss after earnings; making it near impossible to explain the impressive performance of Google.

Brake1Stone has no position in any stocks mentioned. 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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