Monday, July 12, 2010

Google, Apple, and Microsoft

The question that motivates this comment is "what's going on with Google's valuation". The stock is trading at roughly the same level as it was at the beginning of 2007. It's a revolutionary company that was once assumed to be heading to the stars and now the stock is lagging, up just 12% in the last 52 weeks. Not being able to look at one stock in isolation and make any judgement led to a glance at Apple and Microsoft as well. Here goes.

Apple --- From a stock price perspective AAPL is obviously the market darling of the group. The stock is up 165% since January '07 and 88% in the last 52 weeks. It has year over year revenue growth of 49%, an ROE of 34%, and no debt. Going direct to the consumer with its unmistakeable stores and its record of innovation has moved AAPL's products from a brand for afficionados to a high end mass market "must have" with significant room for growth despite top tier pricing. Loved by its shareholders and its product owners, the only questions are how much all possible future growth is already priced into the stock and the perhaps moot Steve Jobs health question. Would someone buy AAPL now and at what level. The story has legs but it's not close to being a value story with its 16% forward P/E in this market, or does its growth potential still make this a steal.

Google --- As mentioned GOOG's stock has lagged in recent years, a befuddling turn of events for the many who view the company as an amazing institution of research and innovation. Like AAPL, GOOG is debt free and pays no dividend. Unlike AAPL its revenue growth has slowed in the last year to 23%, with the advertising slowdown of the recession and its aftermath having hit even this dominant company. The real questions about GOOG revolve around whether they actually care about earnings and shareholders as much as they care about competing on every new technology front to create this overwhelming integrated information service platform to serve the world and make it a better place as well as to satisfy their competitive ambitions. Can this model be funded by new revenues fast enough to justify its 15% forward P/E. It's 21% ROE over the last 12 months raises the question, but it remains a must own stock for institutions. It seems far too early for this stock to stall out and be viewed as a far reaching but amorphous giant. The guess here is that with any sustained moderate growth in the global economy GOOG stock will begin make an upward move and if Android begins to catch fire the stock will be up 50% or more in 12 months. That's just a guess. Android is a small part of the overall Google systems but, as a direct consumer link, it would have outsized stock market power.

Microsoft --- The first technology titan competes on many fronts with Google and Apple but its long term success has led it into a mature company mode despite its still market leading office and p/c software products. MSFT as a stock is down 20% since January '07 and is up just 7% in the last 52 weeks. The big big deal is that its revenue growth is just 6% over the last 12 months, understandable given its base but now in value stock territory. Despite that, with minimal debt, a 42% ROE, and only a regional bank like 10.2% forward ROE how can investors not take a hard look at MSFT right now. The glamour seems to be gone, but this management desperately cares about stock price and it's still without question a powerful company. Is the fear that MSFT is so intent upon competing head to head with GOOG and AAPL on all fronts that they are doing so at the expense of exploiting their core leadership positions to the fullest.

The question here is which of the three is the stock to buy now if one had the inclination to make a choice. Each has its attractions, but the answer may be to sit tight for the moment and buy the one that offers an attractive buy in at some point. It could be said that both GOOG and MSFT are already there No answer here, but with my reading finished too soon and no interest in television at this hour, why not write about it. I hope that there's time to fix any typos in the morning.


Anonymous Hudson Goods said...

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1:56 PM  
Blogger John Borden said...

Hello Hudson Goods Karl,

Thanks for your kind comment.

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11:00 PM  

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