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Apple, Amazon, and Google: The Competition Is Heating Up

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

Author’s Note: This article is a follow-up to my previous editorial The Contrarian View: Four Reasons to Sell Google and Buy Apple.

Anticipation always builds in the marketplace ahead of earnings season, especially with popular tech stocks such as Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG), and Amazon (NASDAQ: AMZN) all providing quarterly reports within close distance of one another.

These market giants have revolutionized our daily lives, and it’s even more fascinating to realize most of this change has occurred within the last two decades. Apple revolutionized the smartphone industry with the iPhone introduction in 2007. Larry Page and Sergey Brin co-founded Google in January 1996 as a research project at Stanford University. Jeff Bezos had a dream to start an online bookstore in 1995, naming his company Amazon after the world’s second longest river.

Fast-forward to present date, and Apple, Amazon, and Google are fiercely competing to become the most powerful name in technology. The concrete borders that once separated one company from another have been knocked down, and the areas of distinction are becoming more fewer as these businesses increasingly overlap. Consumers frequently use the names of all three companies in the same conversation.

Which Silicon Valley powerhouse is a strong buy?

One could make an argument that all three companies--Apple, Google, and Amazon--are all great long-term buys, and it would be a tough argument to beat. However, the stock market can be inefficient which creates a buying opportunity in one stock and a selling opportunity in another.

Apple: The worst is over

Wall Street loved Apple at $700/share, but has since dramatically reversed course on opinion. Most on Wall Street hate the stock now that it’s trading at $400.

Here are four reasons I recommend being a contrarian investor and buying Apple:

  • On April 23, Apple beat second quarter earnings by posting $10.09 EPS on $43.6 billion in sales. The company sold 37.4 million iPhones and 19.5 million iPads during the quarter, both higher than the year-ago period. In particular, iPad sales rose 65% year-over-year.
  • CEO Tim Cook stated on the conference call that Apple will release new products during fall 2013 and throughout all of 2014. Industry analysts have criticized Apple based on its irregular product refresh cycle, when competitor Samsung introduced the S4 smartphone less than 12 months after its successful predecessor. Cook responded by stating Apple will continue to innovate and that competitors have “trade offs” with larger screen sizes.

  • Apple’s board of directors more than doubled its capital return program to shareholders, earning the approval of former critics such as Greenlight Capital’s David Einhorn. The company raised its quarterly dividend by 15% to $3.05/share or $12.20 annually, and the share repurchase authorization increased from $10 billion to $60 billion effective immediately.

  • According to Apple’s financials, the company had a cash balance of $145 billion at quarter end. This is equal to $154 in cash per outstanding share, indicating that investors are paying only $260 per share for Apple’s business. The stock trades at a mere 6x price-to-earnings, excluding cash.

The Apple story becomes even more attractive if you believe that today’s sales will grow or maintain over time. A simple discounted cash flow (DCF) spreadsheet will indicate that Apple’s cash per share will continue to expand significantly, in effect decreasing your cost of ownership. I’m optimistic, as the tablet market alone is expected to triple over the next four years.

Google: Momentum is fading 

In contrast to Apple, I recently wrote that substantial evidence indicates Google’s mainstay product, desktop search, appears to have reached its growth peak. The company is now focused on translating its success on the desktop into mobile, with the jury still awaiting a final verdict.

Here are four reasons Google is a relative sell after recent earnings:

  • The company missed revenue expectations when it reported Q1 2013 results on April 18. Although revenue grew 31% year-over-year, an independent third party which manages $1 billion in advertising for Google clients recently reported a 1% decline after 8 consecutive quarters of 18% increases on average.

  • Earnings were bolstered by an irregular 8% tax rate during the January - March period. This compares with an 18% tax rate for the fourth quarter 2012 and a 19.25% rate on average for the last four quarters.

  • Cost per click, or the amount of revenue Google receives when you click on a paid advertisement, decreased 4% during Q1 2013. The recent quarterly decline comes following weaker ad prices throughout fiscal 2012.

  • Revenue from Google’s Motorola Mobility unit fell to $1.02 billion, compared to $1.51 billion during fourth quarter 2012. Originally heralded as a win-win for shareholders, Google has suffered more than $1.25 billion in losses since the Motorola acquisition in May 2012.

Google is hoping to stem a continued drop in mobile ad prices by forcing new advertisers to participate in both mobile and desktop platforms beginning in the second half of 2013. However, corporate advertisers have indicated that their ROI on the mobile platform can oftentimes be significantly less than the desktop counterpart, thereby stemming their willingness to pay up to Google’s demands.

The stock appears richly valued at 24x earnings, a high multiple for a company which has yet to demonstrate success with a moving needle.

Amazon: Closing in on the race

The ongoing debate between Apple and Google investors is a fitting introduction for Amazon, which is hoping to attract business away from its two larger technology brethren. Apple and Google have market capitalizations of $392 and $265 billion respectively, while Amazon is trailing in a distant third place with $115 billion in market value.

Who could have thought that Amazon could attack Apple and Google on their home turf? Research firm NPD group released its Annual Music Study in April. The report revealed that Amazon has gained 22% market share of the digital music downloads market, up from 15% in 2011 and 13% in 2010. In contrast, Apple’s market share has fallen to 63% from a previous 68% during 2011.

On a larger scale, Amazon is competing with Google to become the gateway to the Internet on both mobile devices and desktops. Studies indicate that online consumers may be skipping Google and going directly to Amazon when looking to make an online purchase, causing the search engine giant to lose a click from a paid advertiser.

Despite the positives outlined above for Amazon, the stock is expensive and showing signs of weakness following recent Q1 2013 earnings. The company has become notorious for it’s varying and unpredictable profitability, and this quarter was no different. First quarter operating margin fell to 1.1% vs. 1.5% a year ago, causing investors to send the stock lower more than 7% on April 26.

Even though Amazon is entrenching on competitors, I recommend that readers stay out of the stock.

Foolish Bottom Line

There’s only one definite conclusion that can be made: the competition between Apple, Amazon, and Google is heating up.

However, not all three Silicon Valley powerhouses are a buying opportunity at the current time. Investors seem to be heavily favoring Google at 24 times earnings, while Apple is earning little respect at a beaten-down 6x multiple. Furthermore, on an anecdotal basis, my own group of friends couldn’t get enough of Apple at $700, but now that the stock has sold off, the average investor is hardly giving it any notice.

If Lebron James can still compete on the basketball court and Roger Federer can still play tennis at Wimbledon, then chances are that Apple will still produce products that captivate and enthrall millions of consumers worldwide.

I recommend that readers take advantage of the market’s short-sightedness in Apple, and wait for a better opportunity with competitors Amazon and Google. Until then, enjoy watching the ensuing battles play out between these tech heavyweights that are all-but-guaranteed to continue.

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

John Macris has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, 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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