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Apple Inc. (AAPL), Google Inc (GOOG) – Big Tech Boys: Even Innovation Needs Iterations

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One of the hottest topics for discussion in the stock markets is the sudden change in the fortunes of Apple Inc. (NASDAQ:AAPL). Since September 2012, the stock has been on a decline, and is currently precariously poised near its 52-week low of around $419.

Its near-term future will depend on the Q2’13 results, where investors would be looking forward to the margins and management guidance. In the smartphone and tablet space, which is the main segment of Apple Inc. (NASDAQ:AAPL)’s revenue (around 63%), it is mainly competing with the power of Google Inc (NASDAQ:GOOG) and the resurgence of Research In Motion Ltd (NASDAQ:BBRY) BlackBerry.

Google Inc

Apple Inc. (NASDAQ:AAPL) is as financially strong as a company can get in a competitive environment. With zero debt and a huge pile of cash, the current market price gives a P/E (ttm) multiple of less than 10. The forward P/E is 8.53, and the PEG is 0.51, indicating that at current levels, the valuations are not very high. The book value per share is $135.62 (P/B of 3.15).

Even if the annual trend is seen, revenue has grown from $42.9 billion in 2009 to $156.5 billion in 2012 (265% growth). Net income has grown 407% during the same period, from $8.23 billion to $41.73 billion. The net profit margin has, consequently, increased from 19% in 2009 to 27% in 2012.

However, if the trend of the last few quarters is seen, it is clear that the performance of the company has been on the decline. Though there has been some sequential growth in the last quarter, year over year performance indicates significant decline in net profit margins from 28.20% to 23.99% (Table I).

This is just one of the reasons which have adversely affected the sentiment. In fact, it is a symptom rather than a disease. Investors are circumspect about the future of Apple Inc. (NASDAQ:AAPL) mainly because they have started doubting its ability to innovate.

Over the years, the company has always built competitive advantage through innovation, and its pricing power is directly dependent on differentiation. Expected inability to bring out some amazing product immediately has led big investors to cut their stakes in the stock.

Table I

13 Weeks Ending

$ millions 12/29/12 09/29/12 06/30/12 03/31/12 12/31/12
Revenue $54,512 $35,966 $35,023 $39,186 $46,333
Net Income $13,078 $8,223 $8,824 $11,622 $13,064
NPM 23.99% 22.86% 25.19% 29.66% 28.20%

Google Inc (NASDAQ:GOOG) is not selling devices for the sake of selling devices. It sells tablets and smartphones so that more and more people use Android-based applications to surf and access services on the net. Samsung has, so far, been a great partner in its endeavor. This increases its capacity to “understand” customer behavior, preferences etc., and place relevant advertisements more appropriately.

This makes the advertisements more valuable. 92% of its revenue comes from advertising, hence, increasing advertisement revenue is the main purpose behind all its creations or acquisitions.

Google Inc (NASDAQ:GOOG) is getting aggressive on improving hardware sales, and recently acquired Motorola primarily for this purpose. With Motorola in its bag, it is planning to go big with the X-Phone & the X-Tablet in the near future. It is also likely to bring out some innovative products like the Google Glass, which is expected to be launched this year.

Financially, it has $48 billion cash on books and debt is $7.21 billion. It is trading at a P/E (ttm) of around 24, and the forward P/E is 14. The significant difference indicates investor confidence in the growth prospects. The expected PEG is 1.2 and book value is $217.33 (P/B of 3.66).

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