Is Apple’s valuation justified?
Apple Inc. (NASDAQ:AAPL)’s growth in Smart Phone sales wasn’t enough to keep analysts on board the company. The competition in the space heated up as Google was able to unify phone manufacturers under a robust Software platform. This helped to keep companies like Samsung Electronics Co., Ltd. (KRX:005930), HTC Corp (TPE:2498), Sony Corporation (ADR) (NYSE:SNE), and Laclede Group Inc (NYSE:LG) market competitive with Apple Inc. (NASDAQ:AAPL).
Apple in its latest quarterly earnings release reported a 3% gain in year-over-year revenue from its Apple iPhone. The potential market saturation of the Apple iPhone is what keeps investors from investing into Apple Inc. (NASDAQ:AAPL). However, the good news is that unit growth was at 7%, which implies that Apple’s gross margins for the quarter declined rather than the demand for smart phones. To be fair, Apple spent an additional $2 billion in marketing related expenses. Apple is spending additional capital into advertising in order to sustain its competitive advantage. The effects of its advertising can be reflected in its 2.7% market share gain, which ComScore quantifies.
Apple is investing capital into advertising while gaining market share in an environment of increasing smart phone adoption. This can be further supported, by IDC estimates that the smart phone market will double between 2012 and 2016 to an incredible 1.4 billion units annually, and Gartner estimates that the tablet market is growing at an even faster rate from 125 million units in 2012 to a projected 375 million by 2016.
While I don’t disagree with the fact that Google Inc (NASDAQ:GOOG)’s growth is predictable, which is why it merits a higher earnings multiple. I also believe that Apple’s advances in market share along with the un-tapped growth opportunity still left in smart phones should keep investors optimistic of Apple’s future. It also helps that Apple is investing aggressively into marketing its products while having plans to deploy a lower cost alternative to its traditional iPhone in the Chinese market later this year.
The article A Professional Viewpoint on Apple Versus Google originally appeared on Fool.com is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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