Google Will Not Fail Like Apple

Image representing Google as depicted in Crunc...

Image via CrunchBase

Google (NASDAQ: GOOG) is up 13.85% since announcing its 2013 Q1 results on April 18. Several analysts have come up with a price target of $1000 per share. A similar prediction brought the downfall of Apple (NASDAQ: AAPL), Google’s greatest rival in smartphones platform market. The search engine giant is headed towards the $1000 price target and does not seem to have any obstacles capable of putting a stop to its rally. Google has become the darling of Wall Street, and a possible benchmark for the industry, taking over from Apple, which has since fallen behind the pack. The biggest question, though, is whether or not Google has what it takes to avoid the unfortunate events befell Apple.

Apple’s story of reaching $1000 is now more of a pipe dream, whereas Google inches ever closer. In fact, Apple never got this close. The search engine closed at $871 per share on May 9, compared to Apple’s all time high of $705. Nonetheless, Apple still holds the position of being the world’s most valuable company in terms of market capitalization. When Apple traded at $705, its price to earnings ratio stood at about 16x. Google is currently trading at about 26x P/E, way above Apple, and one may wonder why I am so confident that it will trade at $1000 within the next 12 months.

Forget the P/E ratio, Google’s future looks healthy

In terms of price to earnings, it would be easy to argue that Apple offers more value than Google. However, we invest in a company’s future, and that is where Google beats Apple. The $1000 price target is also a future expectation, and that is why outlook is key when it comes to this assessment.

Dividend investors, growth investors and value investors all base their decisions on a company’s ability to deliver in the future. This has been Apple’s biggest hurdle coupled with negative sentiments from the investing media. Contrary to Apple, Google dominates its playing field with no major threats. Apple’s main business, the sale of smartphones and tablets, has been under threat due to increase in competition, part of which is engineered by Google through its free Android platform. Google, on the other hand, depends highly on revenue from its websites, which according to the latest earnings results accounted for two thirds of the overall revenue with 67%, while network members’ websites contributed 25%. The company dominates the search industry with a market share of about 67%.

Google’s diversification strategy guarantees continuous growth

Google CEO Larry Page noted during the company’s earnings transcript that, in technology, it is hard to guarantee continuous growth unless you diversify. This justifies the reason behind Google’s introduction of different products aside from its main business. Page said, “…incremental improvements are guaranteed to be obsolete over time, especially in technology.”

Apple has concentrated so much on coming up with different devices, but still in the same spectrum, where device sales and gross margins ultimately translate to performance. Meanwhile Google has already entered the software production market, smartphones and tablets industry, and of course the self-driven cars in conjunction with Tesla Motors.

The search engine giant is also looking to venture into the fiber optics business as it seeks to cut costs associated with network providers. Google is integrating vertically while at the same diversifying its business. Apple can more or less argue to have the same model since it does engage in software production, but the problem is its software is not open for other companies to use.

The Bottom Line

Google has the potential to trade at 30x P/E ratio comfortably without causing a major change to the average industry P/E for the trailing 12-month period. Furthermore, based on the forward P/E of about 16x, for the period ending Dec. 31, 2014. This means that if the company is to maintain the current P/E level, or at least remain within the industry average of 21x, then it would have to trade well over $1000 per share, at approximately $1,423.

However, that is a long shot, considering that the forward P/E ratio is derived based on earnings estimate for that period, and the current stock price. Nonetheless, there is no reason why the search engine giant should not breach the $1000 mark, as its outlook and fundamentals look healthy enough to take the stock over the board. It has improved significantly in terms of managing costs, after beating analyst estimates on earnings, despite coming short in revenues. This shows that the company is becoming more efficient, which would allow it to introduce new products easily since it can accommodate more costs.


One Response to Google Will Not Fail Like Apple

  1. Pingback: How Long Before Apple Caps a Trillion? | Market Pitch

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