Will Apple’s Nemesis Hit the Mythical $1,000 Mark?

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

Apple (NASDAQ: AAPL) had a great run till last September and the phenomenal increase in stock price led investors to believe that it would cross the $1,000 mark. However, a U-turn came and the stock started plunging, declining nearly 40% in just five months time. Currently, the buzz of crossing the $1000 mark surrounds Google (NASDAQ: GOOG). Let’s see the means that can help it reach that level.

The means to reach $1,000

The company has a diverse portfolio of businesses to offer. It is mainly known for its search engine that helps people to get information about almost everything on the internet. The company is currently dominating the online advertising market that currently helps it to generate 87% of its current revenue.

Currently Google’s Android is dominating the mobile apps market and in total there are over 500 million Android activated devices till September 2012. Moreover, around 1.3 million new devices on an average are activated daily. Android is going to extend its periphery into "smart appliances,” which will simplify communication through interconnected devices. Currently Samsung and Panasonic are selling appliances controlled by Android, and Google's unrestricted stand should improve its bottom line.

Rumors are currently doing rounds that Google will soon be launching its own handset named Motorola X. Motorola’s acquisition acts as an insurance policy for Google against Samsung's dominance of the Android platform, which currently accounts for 40% of the entire Android device sales. The success of “could be Google’s own mobile” would increase its current revenue and improve its bargaining power with Samsung.

A robust financial position

The first thing that is hard to go unnoticed in Google’s balance sheet is the $48.1 billion cash and short-term investment. The company generated a free cash flow of $13.3 billion in 2012. Its cash heap represents almost $150 a share which can be utilized for a buyback program or a huge dividend. Google currently has 1/6th of its stock price in cash which should attract value-oriented investors towards it.

A current ratio of 2:1 is supposed to be ideal because then the company is well positioned to finance its short-term obligations. Google’s current ratio is 4.23 times, which further strengthens its financial position. Further the company has very low net receivables representing about 16% of its sales which is consistent over the period of last three years implying that its sales are well converted into cash.

The company’s balance sheet has intangible assets worth $7.5 billion, of which 80% are patents or licenses. These assets will be written over in a period of 8 to 10 years so they will not affect the company’s financial position much. Moreover, patents means that the company can restrict the entry of competitors placing itself in an advantageous position.

The company has a very low debt equity ratio of 0.31, with long-term debt of only $2.99 billion outstanding. Its ROE on an average for the last three years has been around 16%, which is very good. In short, Google is financially in an extremely sound position.

Will Apple grow again from its fall?

Apple’s stock price fall could have been due to many reasons such as investors’ pessimism, lack of innovative products, and absence of Steve Job’s guidance. The company initially grew on the unexpected successes of its innovative products that would beat all expectations. Investors had the same anticipation later on from launch of new products which made Apple’s stock price rise. Moreover till last year everyone wanted a piece of Apple that further helped the stock price push above, and we all know what happened.

It might sound crazy but Apple is actually trading cheap currently with a P/E ratio of under 10 times. The important thing that needs to be done from the company’s end is to increase its dividends from its current yield of 2% and buy back shares with its huge pile of cash to attract a completely new set of investors towards it. Apple has no debt burden and strong fundamentals and still some of its products dominate the market. Investor’s should now invest in the company for dividend and safety rather than huge capital gains.

Final words

Without commenting whether the stock prices of Google will reach $1000 a share or not I would definitely say that the company is financially sound. With a PEG ratio of 1.2 times and a forward P/E of 15 times, the stock still has a lot of upside potential and even if it reaches the mythical $1,000 mark, it would not be an anomaly.

tarunbachhawat has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of 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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