Are Google and Apple Good Buys?

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

Google (NASDAQ: GOOG)’s stock price fell in the first half of 2012, to around $560 in late July. The stock then rallied to about $750 in early October before a disappointing- and untimely- quarterly report took the stock down below $700; that figure is about where Google currently trades. Google had reported a 19% increase in revenue in the third quarter compared to the same period in 2011, but partly because of the addition of the Motorola business unit earnings decreased by 20%. Pay per click ad prices also showed troubling signs, and we’ve noticed Google trying to improve its operations at its core business.

After that quarter, Google trades at 22 times trailing earnings, which would be in line with a large, well-branded, growing company. It looks to us like the decline in net income has been as a result of adding the Motorola business, and we wouldn’t expect earnings to decline further going forward. Instead, we’d look for growth in the core Google business as well as possibly an improvement in Motorola as the company is integrated. Of course, it’s not clear that growth would be high enough to justify the current valuation. Analyst expectations for 2013 imply a forward P/E of 15.

Google was the second most popular stock among hedge funds during the third quarter of the year (see the full rankings). Since Apple (NASDAQ: AAPL) was the #1 stock, this means that Google was also second on our list of tech stocks hedge funds were crazy about. Stephen Mandel’s Lone Pine Capital sold shares in Google during the third quarter of the year, but the fund still owned 1.1 million shares at the end of September and this made Google its second largest 13F holding by market value. Mandel is a billionaire and a Tiger Cub, having worked for legendary investor Julian Robertson at Tiger Management. Billionaire George Soros initiated a position of about 190,000 shares in Google during the quarter (check out more stocks Soros was buying).

Google’s move into tablets and smartphones has left it competing with other tech giants such as Apple, (NASDAQ: AMZN), and Microsoft Corporation (NASDAQ: MSFT). We don’t think that Amazon is a good value; despite its transformative business, the company is unprofitable and has a market capitalization over $110 billion. We have the opposite take on Apple. At a trailing P/E of 12, earnings would probably have to fall for the stock to prove overvalued, and given the strength of its markets we think that it should be able to manage at least modest growth. Microsoft is a more complicated situation. It’s not clear that Windows 8 is going to have a particularly strong release, and it certainly doesn’t look like the Surface tablet is going to help the company much- to the degree it does at all, it may be by whipping other hardware manufacturers into releasing a variety of high quality products running Windows. Microsoft’s current-year P/E for the fiscal year ending in June 2013 is 9, but that likely includes a one-time boost from Windows and Office releases and so we’re not sure it’s that good a value.

We can also compare Google to Research in Motion Limited (NASDAQ: BBRY). The stock has doubled in the last three months, as despite financial troubles- it was unprofitable in the last two quarters as consumers have abandoned its offerings for smartphones from Apple and Google- tech followers are counting on the new Blackberry model to deliver strong sales numbers and save the company. The market cap is now $7.3 billion, and while we wouldn’t buy at this time we’re following Research in Motion closely.

Google has good growth prospects from this point, though the multiples don’t look particularly attractive. Even after expected growth for 2013, it would be trading at a higher multiple than Apple, for example, and likely well higher than Microsoft. We’re tracking company news but wouldn’t quite call it a buy until Google shows that the Motorola acquisition is going to contribute positively to earnings.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has long positions in Apple, Google, and Microsoft. The Motley Fool owns shares of Apple,, Google, and Microsoft. Motley Fool newsletter services recommend Apple,, Google, and Microsoft. 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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