01-24-2013, 07:18 PM #1
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Comparing Revenue and Profit of the big three to their Stock and Market Value.
I am going to use Microsoft as a baseline (of course), let's make believe they are perfectly valued relative to their performance last quarter and see if, in comparison, Google or Apple are currently under or over valued.
The Microsoft Baseline: Revenue - 21.5 billion, Profit - 6.38 billion, Share Price - 27.63
Google Share Price: $753.83. Price adjusted for revenue difference: $433.25, Price adjusted for profit difference: $279.16.
If Microsoft is valued appropriately, Google shares should be worth between $279.16 and $433.25. They would be overvalued by 37%-57%.
Apple Share Price: $450.5. Price adjusted for revenue difference: $516.03, Price adjusted for profit difference: $742.73.
If Microsoft is valued appropriately, Apple shares should be worth between $516.03 and $742.73. They would be undervalued by 13%-39%.
Question: Why does Google enjoy such a seemingly inflated stock valuation, and why was their stock the only one to go up after their earnings call?
Last edited by Ordeith; 01-24-2013 at 07:20 PM. Reason: Formatting
- 01-24-2013, 09:41 PM #2
Stock valuations have never been about corporations current revenues and profits, but rather about expected future revenues and profits. A decade ago, fundamentals/financials were more important than they are today. Your approach would have worked better back then. Stock prices today are determined by so many things unrelated to their companies actual performance, that it can make your head spin. Stock valuations are no longer an accurate reflection of a companies competitive position, particularly when the company deals in consumer electronics.
I have no idea why Google's stock went up. Some assume it is due to Androids world wide market share growing faster than iOS's. I find this ridiculous, as Android has done nothing for Google but cost them billions, without providing any viable plan on how to recoup those costs. However, if enough people are willing to ignore that fact, and believe Google is actually gaining something through Android's popularity, then that obviously doesn't matter as demand for the stock will drive its price higher.
This is what I think is driving Apple's current downfall:
- Investors realized that Apple has sucked every last penny of profit out of their supply chain. This is one of Apple's traditional strengths, but they have "maxed out" whatever is to be gained from it.
- Investors realized that Apple has lost the technological lead. They fear Apple's margins will evaporate together with that technological lead. That is particularly bad for Apple, as they currently enjoy margins only drug cartels can compete with (low cost production combined with high sales value).
- Investors fear that Apple will refuse to compete in the low-end/low-price markets, where most of the world's remaining smartphone market share is to be had. Combined with the fear that Apple has somewhat saturated 1st world markets, investors believe Apple has no place left to expand to.
- Investors fear that Apple is loosing its "cool". When all parents have iPhones and iPads, and even Grandparents stand in line for an iPhone, teenagers usually turn to other things. Market research shows this is becoming a problem in 1st world markets.
- Investors fear the commoditization of the smartphone market. Profit margins will plummet should they no longer be viewed as a status symbol. This would hit Apple the hardest.
- Investors fear Apple is playing everything too close to the chest. They fear Apple is making the same mistakes they made in the 1990's which may again lead them to become a niche and boutique developer of luxury consumer electronics, which nobody but Hollywood hipsters are interested in.
- Apple uses smartphone storage as a means of market segmentation (16GB, 32GB and 64 GB models). Storage being the only difference, Apple sells the 64GB version for $100 more, while it actually costs them but $20 more to build. NAND storage chips are commodity parts, but Apple has many consumers believing they represent a major part of a devices cost. Nokia and Samsung are expected to break this widespread perception soon, further eroding Apple's profit margins.
- Apple is experiencing difficulties in China, as the Chinese government isn't willing to subsidize Apple's iPhone to the extent carriers typically do.
- Investors were disappointed by the iPhone 5. All they saw was an iPhone 4 with slightly modernized hardware (completely expected) with an extra row of icons. Investors fear innovation at Apple died with Steve Jobs.
I believe the market has correctly identified the trend, but the price is falling far too quickly. Apple needs only to introduce iOS 7 with a fresh and modernized UI and come to some agreement with Chinese officials and that stock price could flip real fast. It's an overreaction, just as the markets behaviour towards Nokia was half a year ago. Unfortunately, I have no special insights into Apple's iPhone division, so I can only guess as to where Apple is going, otherwise I would also be long or short APPL.
Microsoft is not seen to be competing in the consumer electronics space (apparently XBOX doesn't count and profits from WP are none existent). Microsoft is not hip. It isn't cool. Microsoft just keeps all the things running nobody directly cares about (unless things don't work that is). If you don't work in IT, all you ever see from Microsoft is the start-up screen on your computer/laptop. All that leads to a somewhat suppressed, unspectacularly steady stock price.
- 01-28-2013, 08:45 PM #3
^As mentioned here. Put together very well.
Google is the new "in" brand right now and most things seem to be working that away (at least PR-wise) so their stock has gone up. Perception plays a huge part in the economy today. RIM, even with a untested product and heavily falling sales, is apparently making the "greatest comeback ever" while Nokia, who actually has new products out that received a good reception, is just holding up. Jobs excelled at this - the company looked as formidable as ever under him and I think this is why the stock is coming back to reality for Apple. To be fair, a company manufacturing expensive laptops and phones SHOULD never be worth more than a company that sells arguably the most precious commodity in the world (ExxonMobil).
It's what happened to Facebook too. People bought in and gave it a sky high evaluation saying that it has billions of users but blatantly ignored the fact that it really isn't making a lot of money from these billion+ users and now you are seeing the stock come back to reality. It happened to Microsoft and it is now happening to Apple. Nothing wrong with the earnings of these companies (if anything, they have beaten expectations) but they just don't have the "potential anymore" (however you define it...that is). Google with its swelling marketshare in the mobile world (from which it actually doesn't earn a lot) is enjoying the stock inflation but I don't think it'll be long before their stock comes down to reality as well.
TL;DR format: Really more about what people think is the coolest company out there than actual financial sense.
- 01-29-2013, 09:03 PM #5
A5cent your thoughts were put together well indeed. Nevertheless Android has very little to do with Google's market value/stock price.
Google's core business search and advertisement actually keeps getting better and more profitable. Simple as that.
Apples one trick pony is finally coming to real life market value.
- 01-29-2013, 10:51 PM #6
I admit I have almost no understanding of Google's finances. I've seen organizational charts depicting all the operations that Google runs and it is truly ginormous. Google is the most diversified tech company I have ever seen.
I take an interest in tech companies financials, but the complexity of Google has so far prevented me from initiating any serious analysis. That, and the fact that they are actually an advertisement company (of which I understand nothing) will likely prevent that from changing anytime soon.
Apple just shovels their surplus cash into investment funds and concentrates on their core business. Understanding Apple is a piece of cake in comparison, as is Microsoft. Nokia is more complex than both of those, but even Nokia is nothing compared to the diversified juggernaut that is Google.
Last edited by a5cent; 01-29-2013 at 11:04 PM. Reason: 3rd paragraph
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