Apple Vs. Google

Posted on January 13, 2010

The heated rivalry between Google and Apple extends to the stock market, where their shares jostle for pride of place in many technology investors’ portfolios. With Bloomberg data showing the price-to-earnings ratios of both stocks higher than 85% of the companies in the Standard &Poor’s 500-stock index, they may struggle to meet investor expectations.

Related story: Why Apple And Google Can’t Just Be Friends

Investors flocked to Google and Apple in early ’09 as it became clear that even a severe recession wouldn’t stall them. Last year, Google’s share price doubled; Apple’s shot up 147%. Apple may be more likely to support its premium valuation. A long record of successfully jumping into new products leads many tech experts to see it as a pricey, but less risky, play. Google, 22 years younger, is still trying to expand beyond its core expertise in Net search.

Alan Lancz, of wealth manager Alan B. Lancz & Associates in Toledo, Ohio, started buying Google and Apple shares in December, 2008. He stopped buying when Google, now at 600, passed the limit of 365 he had set for the stock last April. Apple, now at 210, passed his limit of 130 last May. Lancz raised his six-month price estimates in November, to a range of 620 to 680 for Google and 215 to 235 for Apple. “We like the companies but definitely wouldn’t be buying them now,” he says.

Google may prove more vulnerable to a weaker-than-expected recovery. In 2009, it maintained earnings growth by cutting costs, but sales growth over the past 12 months has slowed to 8.4%, from 31.4% a year ago. (Apple’s sales rose at a 12.5% rate over the past year, about half the growth rate of a year ago.) “So much of Google’s business model is based on advertising,” says Michael Shinnick, a portfolio manager at Wasatch Advisors in South Bend, Ind. Web competition is pushing ad rates lower at the same time that the economic downturn has forced advertisers to slash their budgets. “It’s going to be tougher for Google to put up the type of revenue they have had in the past few years,” says Shinnick. The average analyst prediction for Google’s sales growth is 16%, according to data compiled by Bloomberg, and 23% for Apple.

ECONOMIC WILD CARD
Apple has shown a bit more resistance to the slowdown, and some analysts predict a bump from strong holiday results when it reports earnings on Jan. 25. Its advantage has been a steady rollout of new products that customers love. “I cannot point to another tech titan that has been able to innovate outside their primary product area,” says Michael Pytosh, a technology analyst for the ING Growth & Income Fund. (His fund holds Apple but not Google.) Apple investor Ankur Crawford, vice-president and analyst at Fred Alger Management in New York, notes that despite the popularity of Macs and iPhones, Apple still has a tiny share of the market in personal computers and handsets. “[Apple] can essentially double their share in PCs and handsets,” she says.

PRICEY TECH PLAYS

As dominant players in fast-growing markets, both Apple and Google have advantages that justify paying more for their stocks than for those of rivals. In mobile phones, for example, competition could benefit both companies as they win market share from more established players. Still, serious challenges remain, and the markets they’re in are changing rapidly. Tech consultant John Metcalfe frames the ongoing drama this way: “Google doesn’t know what it’s going to be yet. It’s like [a batch] of corporate stem cells–genes trying to arrange themselves. Apple on the other hand, knows exactly what its game is. That’s what makes this so fascinating.”