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Analysis of each company
Apple is a designer and marketer of consumer electronic devices and software. The company is also vertically integrated with respect to retailing, operating its own stores and functioning as one of the biggest online retailers in the world. Apple's primary products are the iPhone ($80.4 billion), iPad ($32.4 billion) and portable computers ($17.1 billion). Other billion-dollar products are desktop computers, iPod music players, iTunes, peripherals and software (Apple 2012 Annual Report). Apple's customers are primarily consumers who purchase through retail channels, either from Apple or authorized third party retailers. Customers also include small and medium-sized businesses, educational institutions and government. Geographically, Apple is geographically diversified. Leading regions are the Americas (36%), Europe (23.2%) and Asia-Pacific, ex-Japan (21.2%). Suppliers to Apple include manufacturers like Foxconn that assemble the products and the different component suppliers, of which they are dozens for any given device. Most suppliers are located in China. The company's leadership underwent a significant change in 2011 with the retirement and death of founder Steve Jobs (Potter & James, 2011). The current leadership consists of CEO Tim Cook, CFO Peter Oppenheimer and the company's functional managers involved in the design and marketing of its products. Most of the C-suite team was with the company under Jobs, so there is a high level of continuity in the leadership of Apple, though Jobs was a driving force in the development of many hit products.
Google is primarily an advertising company. The company has a leading market share in mobile operating systems (Android) and a large share in Internet browsers (Chrome) but does not earn much revenue from either of these. Advertising accounts for 87% of the company's revenues, with the newly-acquired Motorola Mobile 8.2%). The company competes directly against Apple is mobile operating systems and Internet browsers. Otherwise, Google's business model is to drive traffic to its sites and its partner sites, and then sell advertising based on the volume of the traffic and whatever other information Google has about the visitors to a particular site. Google is the industry leader because of its exceptionally high web traffic -- it owns several of the top 20 websites in the world (Alexa.com, 2013).
Google has a diversified customer base. As the world's largest seller of online advertising, Google sells to a broad base of marketers in all fields. Google's customers are global in terms of their geography. There are only a few countries in the world, notably China, where Google does not have a dominant market share. Google's suppliers are the Internet surfers whose eyeballs Google sells to its advertisers, and the talent within the company who builds the sites that attract the Internet traffic. Google has retained its leadership team for several years now, including CEO Eric Schmidt and co-founders Larry Page and Sergey Brin, both of whom still have major roles within the firm. This leadership team stewarded Google to its current position of market dominance.
The stock charts can be found in Appendix A. Apple's IPO was in 1985, and the company has experienced a typically wandering pattern since that point, mirroring the fortunes of the company and the broader market. Apple's recent history is tied more to its product successes. The company bottomed out in early 2009 at less than $100, but its stock has increased steadily and significantly since that point. The decline in late 2008 was in line with market declines, perhaps on the expectation that Apple's fortunes would be tied to broader economic performance. We know now that this was not the case. Apple's new product introductions since that point -- the iPhone and the iPad -- have accelerated the company's growth, so that the level of the stock increased each year from Jan 2010, Jan 2011 and Jan 2012. Its most recent history, however, shows a steep increase to over $700 and then a steep decline since that point. Its highs reflected tremendous profitability, but its market fundamentals -- it does not lead smartphones by operating system, personal computers or tablets by operating system -- were misaligned with a valuation that made it the biggest company in the world by market cap. Apple instead has dropped into the $400s. This reflects market belief that there are no hit products imminent to spur growth, and that the dividend payout rate is relatively low for its earnings.
Google went public in 2005 and its stock has had a general upward trend since that point. There was a decline in late 2008/early 2009 with the rest of the market, something that reflected a reduction in online advertising as the economy entered recession. Since that point, however, the company's stock went through a period with little change (in the $600 range on Jan 1, 2010, Jan 1, 2011 and Jan 1, 2012). Since the beginning of 2012, Google's stock has increased. With the economy beginning to grow again, online advertising is once again a growing market. The increased dominance of Android is also something that has provided optimism for investors that Google will be able to continue with new hit products, or at least leverage existing market share to earn revenue.
For Apple, the most critical news events for the company since 2010 were the launch of the iPad in that year and the death of Steve Jobs in 2011. The iPad launch would be expected to have a substantial boost on the company's stock price. This is because if the product is a hit, it will generate tens of billions of revenue per year. The iPad launch followed on the heels of the iPhone launch that propelled the company to its current level of industry stardom. The iPad launch should have boosted Apple's stock price significantly because the company had worked hard to keep the details of the launch secret. Thus, the company might not have traded on the rumors but rather the news.
The death of Jobs should have had a negative impact on the company's stock. There was a short period immediately after his death where the company suffered, but it bounced back on the strength of massive sales during the following holiday period. However, the market can consistently looked for signals that Apple would be able to continue to launch hit products without Jobs, and has lost significant value in recent months as the market begins to doubt that Apple will grow any further. Its current forward P/E is just 8.56.
For Google, the company's antitrust suit filed by the busybody Federal Trade Commission was a major news driver. When, in January of 2013, Google volunteered to make some changes in exchange for having the suit dropped, this should have been good news for the company. A successful antitrust suit could have forced Google to sell off some businesses or otherwise break up. This would have devastated the company, which relies on search evidence to drive revenues from advertising. Google stock should have gained on this news.
Another piece of news that should have affected Google's stock is the Samsung/Apple patent infringement battles. Samsung is a key client of Google's Android operating system. While Google does not earn money on Android, the popular O/S drives traffic to Google sites, enhancing the company's revenue capabilities. Samsung is the leading smartphone producer and the only one truly competitive with Apple on quality. In the U.S., the lawsuit was found to go Apple's way, and Apple was awarded over $1billoin in damages. While Apple makes that much money over the lunch hour anyway, the relevance of the ruling could diminish Samsung's competitiveness in smartphones, opening the door for Apple to regain market share lost to Google in this industry. Google needs Samsung to remain industry leader. This news should have caused a decline in Google's stock.
Overall Financial Analysis
There are a few key characteristics of financial data that are important. For equity investors -- especially when dealing with companies that have low dividend payout ratios -- the growth rate is critical. Both of these companies have strong growth rates. The margins are important as well, and both companies have very healthy margins. Liquidity and solvency are also worth considering, and again neither of these companies has any issue whatsoever on its balance sheet. The only issue is whether the past growth rates can be sustained.
Both companies are ridiculously profitable. Such hyperbole is warranted when the numbers are examined. Apple earned $41.7 billion on revenues of $156 billion in FY2012. These figures represent increases of 61% and 44.5% respectively. For a company this large to have growth figures like that is exceptional. Apple now has $97 billion in long-term investments on its books, no long-term debt, $39 billion in cash -- so $133 billion in money it can use for whatever project it wants. This is actually a detriment because the company has trouble finding worthwhile investments. With an exceptional income statement and the best balance sheet in the history of financial accounting, Apple's finances are exemplary.…[continue]
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