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The Contrarian View: Four Reasons to Sell Google and Buy Apple

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

Whether you view it as a benefit or detriment, momentum plays an integral role in the daily movement of stock prices. As of this writing in April, market participants are discussing the recent sell-off in gold, as demonstrated by the 13% decline in the SPDR Gold Trust that occurred on Friday, April 13 and Monday, April 15. Gold has fallen more than 25% from its all-time closing high of $1,800+ in September 2011, and now bulls and bears alike are revising their 2013 price forecasts on the precious metal.

The unfolding events in the gold market make a great introduction to the ongoing dichotomy in tech giants Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). Throughout 2011 and 2012, Wall Street analysts embarked on a game of catch-up, hastily raising their earnings estimates and price target on the maker of iPhones and iPads as Apple beat expectations quarter-after-quarter. In contrast, Google fell out of favor with the Wall Street community as Apple gained momentum and investors eagerly awaited the Facebook IPO.

Fast forward to present date, and investors are looking in the mirror at a reverse image: Apple has made a round-trip from $400 to $700 and back, while Google has risen nearly 60% in the same time frame.

How can readers make the correct investment decision in the midst of yet another change in market sentiment?

Here are four reasons why Google is a relative sell within technology:

  • Desktop search usage appears to be peaking, as Internet users worldwide transition to mobile devices such as tablets and smartphones. Google’s dominance in the mobile arena is less secure, as evidenced by a must-read New York Times article which discusses how competitors Apple and Amazon are gaining a mobile foothold.

  • Advertiser revenue declined 1% year-over-year during first quarter 2013 at IgnitionOne, a third party which manages more than $1 billion in annual Google advertising for 500+ clients. The figure is particularly worrisome as the same metric rose at an average 18% during the last 8 quarters (Jan. 2011 - Dec. 2012).

  • Google’s earnings mix is shifting towards lower margin areas. The company is introducing an “Enhanced Campaigns” feature during the second half of 2013 in order to offset declining margins. Advertisers will be required to adopt the new standard on a take it or leave it basis, which may cause some customers to defect.

  • Facebook Home is a credible threat to Google’s search dominance on the mobile platform. While analysts may downplay Facebook’s new initiative, investors should recognize there is no precedence in mobile. Further adoption by users as the "gateway" to your phone could be meaningfully detrimental to Google’s mobile ad revenue.

Here are four reasons why Apple is a relative buy within technology:

  • Apple’s stock trades on prospects for the iPhone and iPad. An iPhone 5S launch is likely during the second half of 2013, and Apple is rumored to introduce the new smartphone in three screen sizes to appeal with a broader audience. With respect to the iPad, CEO Tim Cook recently stated that 50% of iPad buyers in Brazil and China are first time customers. The tablet market is also expected to triple within the next four years.

  • On April 4, analysts at Lazard Capital initiated coverage of Apple with a Buy rating, $540 price target, and stated to clients “the worst is over.” As I alluded to with the introduction, Wall Street was overly euphoric on Apple during the upside swing, and the Street has now reversed course with overwhelming pessimism. At minimum I’m looking for a reversion to the mean.

  • Competitor Samsung’s emphasis on software with the new Galaxy S4 indicates that hardware improvements are diminishing. Apple maintains the best-in-class software among its class of devices. Wall Street will eventually realize that software is becoming the distinguishing factor among smartphone makers, playing to Apple’s strength.

  • Analysts believe a potential dividend raise by Apple’s board of directors could attract a new class of income investors. The company has not increased its dividend since first introducing a $2.65 quarterly payout, leading some to speculate when an announcement could be made.

Does Facebook fit into the Apple/Google equation?

Facebook (NASDAQ: FB) is scheduled to release first quarter 2013 results after the market close on Wednesday, May 1.

Analysts have lowered their earnings estimates for Facebook ahead of the upcoming release. Wall Street believes that an increased percentage of mobile visits to the social media giant will have a revenue impact on January - March results. Furthermore, I believe full-year 2013 and 2014 forecasts for Facebook are subject to downward revision based on the same logic. As of this writing, analysts have left their original numbers intact.

Facebook recently announced the launch of Facebook Home on Google’s Android platform, which could further catalyze the transition of desktop usage towards mobile. In addition to Android, Facebook updated its Apple iPhone application to version 6.0 with the inclusion of “Chat heads,” an innovative feature which allows users to chat with friends throughout the application. All in all, these feature improvements will continue to drive the growth of the mobile platform over desktop--a negative for Facebook shareholders.

Finally, industry experts are speculating that Twitter, the 140 character messaging service, could be gearing up for a 2014 initial public offering. This anticipated event could cause investor dollars to shift away from Facebook, similar to how the former attracted investor dollars away from Google during 2011.

I do not recommend that readers invest in Facebook based on the reasons above.

Foolish Bottom Line

Truth be told, I could fill a room with Wall Street analysts who believe that Apple’s best days are behind and Google’s rise to dominance is here to stay. However, my experience indicates now is the right time to be a contrarian investor. As a former associate at an equity research firm, I’ve seen Wall Street repeatedly play the momentum game of stock market, ebbing and flowing like the ocean tide.

The valuation disparity between Apple and Google has become extreme, and I expect improved fundamentals and a reversion to the mean will put the wind behind the backs of Apple investors once more. Google currently trades at nearly 24x price-to-earnings, while Apple trades at a paltry multiple of 9x earnings.

Investors may experience an initial change in sentiment as soon as Tuesday, April 23 following Apple’s second quarter results.

Thanks for reading, and consider subscribing to my posts for more Foolish ideas on outperforming the market.

John Macris owns shares of Apple in his individual and managed accounts. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, 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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