Apple earned more profits in the last 13 weeks of 2013 than Google earned in all of 2013. If Apple's profits were to fall, they would have to fall hard and steep just to get to 2x Google's profits. That said, forecasting a precipitous drop in Apple profits ignores data on a highly satisfied and extremely loyal base of Apple customers. Correct, but that's in absolute terms. The size of a company matters, but to an investor, return matters more.
A share of Apple is (by analyst consensus) is expected to generate ~$43 in profits this year and ~$46 next. If that happens, and especially if that profit growth continues around a 9% clip, that's a hefty cash machine. Investors are saying (they could be right or wrong, but the valuation implies it) that they see substantial risk that those numbers won't continue to be as robust. They are recognizing that all it would take is a slip in the popularity of one product (the iPhone) or even continued popularity but a slip in pricing power, and the profits could stall or even decline markedly. It wouldn't take a crazy scenario to see this occur. If you think otherwise, you could be purchasing every share of Apple you can afford, as a $520 price for something that is certain to make $43, then $46, then $50, and so on is a bargain. It's the bull case for AAPL at its best.
A share of Google, by consensus, should generate ~$52 in profits this year and ~$62 next. That's more profit per share than Apple, and a much higher profit growth rate (almost 20%). By placing a $1180 price tag on GOOG, investors are saying they are willing to pay more for that profit per share and growth rate. Should Google's profit growth slow to 15% after that, they'd still generate $72, then $82, and so on per year. That said, they're not immune to profit stagnation or decline either. But investors are suggesting through valuation that it's not as likely. That's the point I was making. Should a competitor (Yahoo, MSN, Facebook, or even someone completely new) storm onto the scene and start gobbling up share of the ad market, Google is so broadly diversified and ingrained that there's no conceivable scenario where the decline could be rapid. Even in their worst case scenario, their growth might stall to 10%, then into single digits, but to actually stop or contract, there would have to be a crazy catalyst - not just something like one product losing wind or a margin decline, as in the case of Apple.
Hopefully that makes sense. Just trying to answer the oft-asked question of "why is Apple's multiple so cheap but Google's is higher?" |
