Is Apple Still King of the Tech Titans?
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
"Mirror, mirror on the wall...."
If you were building a diversified portfolio and chose to limit your tech titan exposure to one company, would you pick Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT) or Google (NASDAQ: GOOG)?
Now that Apple’s share price has come back to earth, investors are wondering if the company has run out of “wow” and is left with re-launching their current product line with a lot of little “a-h-h-h-h-s.” Re-launching existing products with tiny extras may help gross sales, but the cost of adding additional “cools” to these re-treads could tighten once hefty gross margins, even as Apple increases efficiencies to help maintain a solid operating margin.
From cool to cooling off
Apple, in the eyes of many analysts, is simply “less exciting” and more “range bound” than in the past. While more sophisticated investors with an appetite for risk might consider option strategies, value investors are considering dollar cost averaging and potential long term holding benefits.
By all accounts, the company’s latest quarterly numbers were “off the hook,” it was apparently not enough to support a $700-plus stock price. The market is now valuing the company differently as senior management ops to change their forecasting method from a single number to a “guidance range,” with no EPS estimates, in an attempt to manage both shareholders’ and analysts’ expectations.
Many techies think that Apple still has a few tricks up its sleeve, but some analysts are less certain and do not appear to be buying into the hype of potentially new “insanely great” products.
Apple could boost share price by using more of its cash hoard to step up its stock buyback plan or continue to make certain strategic investments, like its investment in the development of fingerprint sensing technology. The potential benefit of an increase in stock buybacks is clearer than the acquisition of any additional strategic investments.
A paradigm shift, adjusted model and the subscription connection
Microsoft, on the other hand, just announced Office 365, a subscription service that its Chief Executive Steve Ballmer called an “innovation shift and a business model shift that [the company] is enabling.” The service, $9.99/month or $99/year, will give subscription users first crack at new features and updated services as often as every three months with more web-friendly options, including additional online-file storage capacity and complimentary minutes on Microsoft’s Skype video-calling service. The company is using the model it created with its successful subscription service for Xbox Live--where they sold over 70 million consoles, created a lot of loyalty and sold a bunch of movie and TV show downloads since inception--to create a new cash machine model with application software.
From Apple bobbing to Microsoft subscriptions
Steady streams of income from Office, X-Box Live and SkyDrive are enticing. This move could create predictable and consistent cash flow year over year that would have a positive impact on shareholder value. With this cash generation, the company could substantially increase dividends or return to a stock buyback program further reducing its current 8.4 billion shares outstanding. The anticipation of such action could reward Microsoft with an increase in share price.
New Google emphasis on video subscriptions, further monetizing YouTube et al
Finally, Google just keeps creating cash flow from its flagship search engine as it builds up its Android business and considers charging YouTube subscriptions for its more popular channels, further monetizing its video viewing business. Google continues an all out push with content creators to help them form several channels of great unique material that can only be found on YouTube. Google's share price continues to reflect the company's reputation as a proven money maker.
Now back to our original question
So, now that we have some information about what the companies are doing, what about our original question --if you could only buy one tech company stock, which one would you choose? Apple appears to be oversold, while Google appears to be fairly priced.
If you own Apple, and it appears to be oversold, it might be a good idea for you to hold onto it. Its current PEG ratio is .74 which supports the argument that it is currently undervalued. PEG is a widely employed indicator of a stock's possible true value. A crude analysis suggests that companes with PEG values between 0 and 1 may provide higher returns. Google and Microsoft have PEG ratios of 1.19 and 1.17 which suggests that they are both close to being fairly valued. If you are a new investor, you may want to consider Apple as well.
If and when Apple's share price increases, some analysts have target prices north of $500, you may want to swap out of Apple and consider Microsoft. The effects of Microsoft's paradigm shift and new model could start to kick in the next quarter or so and may create a sustainable increase in cash flow that could add substantial value to the company's share price.
Anyone of the three is still a good investment. If you have to pick one, start with Apple, switch to Microsoft, keep watching Google.
|Return on Assets||20.58%*||13.41%**||9.59%**|
|Return on Equity||38.41%*||22.62%**||16.61%**|
Trailing Twelve Months (as of December 29, 2012)
Trailing Twleve Months (as of December 31, 2012)
mjwcopywriter has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of 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!