First let’s get the important, yet dry, accounting out of the way. Below is a chart of AAPL operating income vs various expenses. Generally speaking, it is a good indicator if operating income is growing faster than other accounts…in a smooth fashion, like AAPL below.
These figures were quarter over quarter; so consequently there may be ‘lumpy’ periods. GOOG, below, is showing less operating income now, however this could be a function of a growing company too, not only a company that is spending. Like AMZN, another QQQ ‘heavy weight’, the two may be forgoing short-term profits for long-term market share positioning, employee dedication, and dominance. Google’s main operating cost component has historically been traffic acquisition costs. In 2011, however, increases in employee compensation drove a meaningful decline in EBITDA margins from 64% in 2010 to 58% in 2011. On another accounting statement, the balance sheet, we will find the amount of cash each company has.
To put this wild amount of cash into prospective, AAPL’s cash size is about the same as the market capitalization of INTC, the 6th largest weight in the QQQ. The two cash sizes (net of debt) are $35 billion and $116 billion for GOOG and AAPL respectively. They trade at 15.8x TTM (AAPL) and 22.2x TTM (GOOG); but backing out the cash net of debt the two trade at 13x TTM (AAPL) and 19.1x TTM (GOOG) while the SPY trades at 15x.
Depending on what your time horizon is…AAPL or GOOG may fit you better. It is important to remember that fundamental analysis does not support stock price in the short term, so if AAPL or GOOG goes against you with a long bear candle on a 15-minute intraday chart, in this example, trailing 12 month PE multiple less cash does not help support price.
It can be argued that GOOG may be the stock for the long term and AAPL for the medium term. At its ‘core’ Apple is just a consumer products company with a large following (large being an understatement). Perhaps the low multiple in AAPL is reflective of the ‘fad’ risk implied in the business. Hopefully there will be another great American entrepreneur like Steve Jobs; that revolutionizes the industry and destroys the status quo. While AAPL may be in its prime, they are now no longer the underdog…they have become the competition and the one to beat. GOOG, on the other hand, is also the major player in their space. Google is clearly a beneficiary to the smart phone revolution, as mobile search ads represent nearly 34% of GOOG’s stock price, according to Trefis Price Analysis. At one point in time 80% of GOOG’s mobile search revenue came from iOS devices (AAPL), but this figure has been leaking lower as consumers adopt other phones.
It is important to remember that these are just stocks. AAPL and GOOG may have historically been winners, but there is no guarantee that tomorrow they will be anything similar. Each day you ‘re-buy’ your portfolio, essentially confirming that you like the underlying price & fundamentals in addition to the risk-reward relationship. If this is so, considering we are near all time highs in both AAPL & GOOG, the risk reward is up to you.
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mark@keeneonthemarket.com
