The great Google-Apple divergence

Both companies offer similar profit margins of 25%, but the search giant's are on an uptick while the Mac maker's have been trending down.

By TheStreet Staff Jun 17, 2013 3:15PM

thestreet logoThe Google logo is seen on a podium and projected on a screen at Google headquarters in Mountain View, Califorina Paul Sakuma, AP By Dana Blankenhorn


Back in 2011, when I first started writing about financial topics, I remember pounding the table for Google (GOOG) over Apple (AAPL).


I was still pounding the table last September. At Seeking Alpha, I wrote a story called "A Strong Cloud Beats as Strong Device." Since then, investors have been buying that idea big-time.


Maybe too big. Since I wrote that piece, Google shares are up nearly 27%, a roughly $70 billion increase in its market cap. Apple, meanwhile, is down 34%, a loss of almost $200 billion to investors.


So my efforts have turned toward the other side of the trade. I have written lately on TheStreet that Apple is practically giving its stock away and that Google is in a bubble. 

This hasn't changed the trend. Investors are still paying 250% more for Google earnings than for those of Apple. They're paying almost $6 for every $1 of Google sales and less than $3 for every $1 of Apple sales.


The reason given for the divergence is growth.


Apple's sales figures for the quarter ending in March 2013 were only about 10% higher than those for the previous March. Google sales were up nearly 35%, year over year. Both companies offer similar profit margins of 25%, but Google's are on an uptick and Apple's have been trending down.


The argument is that Google is growing faster, that its margins are expanding while Apple's are contracting. That's true, but it still doesn't explain such a huge divergence. Such arguments are usually made to explain what has happened. You make money from what will happen. 


What I know is that Apple, which before the divergence seemed to be run in order to please itself, is now trying very hard to please investors and consumers. The company has dumped a great load of cash on shareholders, is buying back stock as fast as it can, and now reportedly plans to launch dirt-cheap iPhones and phablets by the end of the year, USA Today reports.


Google, meanwhile, has been teasing a Glass product that may flop completely in the mass market, it has tied products together to control users, and it has begun running afoul of governments on both sides of the Atlantic. 


Today Apple is increasingly seen as the scrappy underdog, Google as the heavyweight bully, and FossPatents writes that Europe is looking into Google's Android licensing practices.


The readjustment, when it comes, may be sudden. Things will probably overcorrect, because what was true for Google, that the cloud is more powerful than the device, is going to remain true.


But if Apple can even achieve a market-matching price-to-earnings ratio, it's a $600 stock. For Google to match the market multiple it would be closer to a $500 stock. Prices that don't match fundamentals are dictated by fashion, and fashions change.


At the time of publication, the author owned shares of Google and Apple.



More from



Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
266 rated 2
485 rated 3
660 rated 4
586 rated 5
652 rated 6
640 rated 7
504 rated 8
289 rated 9
159 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.