Google vs. Apple - Two Greats Battle

By Matthew McMichen - October 9, 2012 | Tickers: AAPL, GOOG | 0 Comments

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In a previous post, I wrote about the fact that everything and everyone, including corporations, have a story.  I then went on to say that stories are typically multifaceted, and every one story has a number of contributing smaller stories, which come together to tell that greater tale.  And, as a geeky accountant, I find it exciting that ingrained within every company’s greater story is its financial statements.

In this post, I want to highlight a few plots within the financial narratives of two of the largest players in the technology world today, Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL).  Although these two companies are not technically in the same industry group and offer a variety of products/services that differ from one another, there’s no denying the developing rivalry between the two as of late.  And much like the Twilight Saga’s “Team Edward or Team Jacob” conundrum, most technology geeks these days find themselves in one of two camps—either Team Google or Team Apple.

With share prices of both companies recently soaring to new heights (especially Google) the financial narratives should be all the more important to investors.  Specifically, we'll take a look at revenue growth and gross margins to see how successful the companies have been at not only generating revenue, but also at managing the corresponding costs to do so.  We'll also evaluate each company's debt to equity ratio to see how financially stable they are, and their return on equity to see if they’re adding value to shareholders.  Lastly, we’ll look at their price to earnings and price to free cash flow ratios to see how well they're priced.

*Data obtained from fool.com

Google vs. Apple – Round One

As you can see from the above chart, the Google vs. Apple story (or at least the financial performance chapter) appears to be a good one.  Both companies managed to achieve an impressive five-year average revenue growth, but Apple is the clear winner here with 43.09%—over twice that of Google’s 21.50%.  However, Google trumps Apple at managing its costs with an incredible five-year average gross margin of 68.70%.  So far, the battle within this story is shaping up to be an epic one.

Both companies are in great financial condition, with a debt to equity ratio of only 0.10 for Google and 0.00 for Apple.  It may be worth mentioning though that Google’s 0.10 ratio is the result of recent increases in its long-term debt.  However, there’s no questioning Google’s ability to pay this debt down, and I’m therefore not the least bit concerned with its financial condition.

The plot thickens a bit when comparing each company’s return on equity.  Once again, Apple comes through with a major blow by generating more than twice the trailing twelve-month return on equity earned by Google.  Google’s return of 17.20% appears quite good on a standalone basis, but sitting next to Apple’s 35.90%, it definitely loses some of its appeal. 

Given Apple’s standing thus far in the narrative, I would expect Google (whom is inarguably a great company—just not up to Apple’s level) to be the cheaper buy.  But shockingly, Google has a more expensive P/E ratio at 22.80 compared to Apple’s 15.70, and it has a P/FCF ratio that is nine times that of Apple’s.  Am I missing something here?

Google vs. Apple – The Victor 

Based on a quick, high-level analysis of the financial narratives of these two greats, Apple appears to be the better story.  However, the financial stories of these companies are only two among many that make up their greater stories, and much more research and analysis are necessary to form an investment decision.  But, if the remaining stories within the Google and Apple narrative are anything like the financial stories, Apple is the only one currently worthy of your investment bookshelf.

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