Apple Inc (AAPL), Google Inc (GOOG): Is the Smart Money Getting Out Now?

Apple Inc (NASDAQ:AAPL) was one of billionaire Stephen Mandel’s big bearish bets during 3Q. Mandel decided to dump over 40% of his firm’s 2Q Apple shares during the third quarter, removing the tech giant as Mandel’s largest 13F holding and dropping it down to ninth. Mandel, a Tiger cub, left Robertson in 1997 to launch Lone Pine Capital and now manages some $17 billion in assets. Lone Pine prides itself on focusing on ‘bottom-up’ investing, and has returned about 23% over the last eleven years, beating the S&P 500 by over 20% per year.

LONE PINE CAPITAL

Mandel is a believer in the future of the Internet and its disruptive capabilities. Mandel reiterated these thoughts at this year’s Invest For Kids Conference, where he touted Verisign as a stock to watch. Even so, there appears to be a point where even a market-leading tech company can get ahead of itself, as it appears this has happened with Apple Inc (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG). Mandel’s 13F shows him losing interest in the once favorite big-name tech stocks and looking to other areas of technology for the sector’s next rapid growers.

Apple slightly missed EPS consensus for last quarter and guided down next quarter’s EPS on higher product costs. Concerns over growth have pressured the stock of late, with a 10% slide from September through October. The tech giant has missed earnings in two consecutive quarters for the first time in ten years, where iPhone results came in as expected, but iPad sales were off. Although there is no denying Apple’s dominant position in various tech markets, we believe that questions about its ability to continue to redefine products now pressure the stock. Apple Inc (NASDAQ:AAPL) managed to grow EPS at an annual rate in excess of 100% over the last five years, but sell-side analysts only expect 20% annual growth over the next half-decade.

Google is another company that like Apple, is an undeniable industry leader, but has become so big that future growth capabilities are being questioned. Google recently posted worse than expected revenue and earnings numbers as it continues to face struggles with the Motorola integration. Although the search giant has a dominant search market share position, the online advertising business is becoming increasingly competitive. One such change to the advertising game is the importance of mobile search ads, which currently yield less profitable margins than PC search ads do.

Another headwind for Google and its ad revenues is the increasing competition from social networks. Although Google has its own social network, Google Plus has not managed to catch the attention of Internet users like that of Facebook. Google trades at 21x earnings, well above Apple Inc (NASDAQ:AAPL)’s 12x, and above its major search peers – Microsoft (15x), Yahoo (5x), and AOL (3x). Google is also faced with a rapid slowdown in growth from its previous five-year earnings CAGR of 21% to only 13% for the next five years.

The Walt Disney Company (NYSE:DIS) was another victim of Mandel’s downsizing—Lone Pine dropped 20% of its shares in 3Q, dropping Disney out of Lone Pine’s top ten holdings, from ninth at the end of 2Q to eleventh at the end of 3Q. The entertainment company is a bit more diversified than some of its industry peers, such as News Corp and Viacom. Disney managed to post last quarter earnings that were 15% above 3Q 2011, as TV networks – ESPN and Disney Channel – fueled growth. Disney’s theme park units also continues to perform well amid a weak economy. Although Mandel found a reason to sell, we see the acquisition of Lucasfilm, known for the Star Wars franchise, as a key driver of future growth with various cross-platform and cross-selling opportunities. Disney currently trades in between News Corp (21x) and Viacom (12x) at 15x, but we believe the argument can be made that Disney’s product mix warrants a premium multiple.

Mandel made a 25% increase in shares of Priceline.com Inc (NASDAQ:PCLN), and the stock now sits atop Mandel’s 13F worth over 5.3% of his firm’s 13F. After the travel site announced it was purchasing rival Kayak, its shares jumped over 9%. Priceline now trades more in line with key rivals at an earnings multiple of 23x, compared to TripAdvisor’s 28x and Expedia’s 22x, but is cheap when looking at its forward P/E of 16x. Check out our other thoughts on Priceline.

Revenues are expected to be up 15% in 2013 on market share gains, not including revenue additions from newly acquired Kayak. We are intrigued by Mandel’s investment and cannot help but agree that Priceline is a stock worth taking a look at. The global travel service leader gets over half of its bookings from international markets, and the addition of Kayak will give Priceline a more prominent mobile presence and mobile offering.

Although Apple Inc (NASDAQ:AAPL) and Google might be losing luster in the eyes of Mandel, a tech company Lone Pine is taking an increasing interest in is Cognizant Technology Solutions Corp (NASDAQ:CTSH), upping his stake 24% in 3Q, and pushing Cognizant up from Lone Pine’s 13th largest 13F holding to its third largest.

This 24% share increase from 2Q to 3Q comes on the back of a 46% increase from 1Q to 2Q. Cognizant is expected to grow revenues 17% in 2013 and has a diverse customer base, with clients operating in industries such as insurance, manufacturing and healthcare. Part of what will be the key driver for Cognizant’s robust 18% five-year EPS CAGR will be an increase in demand for custom IT services, particularly in the financial services and healthcare segments. Cognizant warrants a premium valuation, trading at 18x, given its industry-leading position and its spot as a top player with an almost $20 billion market cap.

As top fund managers continue file their third quarter 13Fs, one overwhelming theme we have seen is that billionaires are falling out of love with Apple Inc (NASDAQ:AAPL) and Google; we tend to agree that the hype and growth might be cooling for these tech giants. We do find hope in some of the smaller tech companies, such as Cognizant and Priceline. The one bet we are making against Mandel is in Disney. Mandel sold off a large portion of his shares, but this may well have been before the Star Wars deal and perhaps Mandel will reconsider once the deal is finalized. Be sure to check out Mandel’s profile and holdings.

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