Source: Beni Krausz via Unsplash
Making some decisions are fairly easy, like choosing a cheap flight between New York and San Francisco. Do the search on a price comparison site, pick your low fare. But choosing between investing in tech stalwarts, requires a bit more analysis to simultaneously evaluate many different objectives.
Some times, analysts make it easy. For example, last month, APPL stock was downgraded by the research teams at UBS, BGC Financial L.P., Pacific Crest and Mizuho. Not suprisingly, the stock has remained range bound ever since.
UBS sent out a pessimistic note saying that smartphone buying interest in North America was at its lowest since the financial crisis. BGC showed concern that AAPL stock had peaked under Tim Cook’s leadership and that things would only get worse from here.
Pacific Crest says it’s unlikely that 2017 iPhone sales unit growth will be in the mid-to-high teens. It also warns investors not to expect significant margin expansion. In fact, firm recommends that large-cap investors should ditch AAPL and instead purchase GOOG which offers an excellent risk/reward profile and substantially more upside potential compared to Apple.
Mizuho says AAPL stock already has the upcoming iPhone enthusiasm fully baked into the price and expects limited upside to near-term estimates.
The rapid pace of the rating cuts had Jim Cramer labeling one analyst’s downgrade a ”showboat call.”
But the fact that AAPL stock has stalled after the downgrades tells you that investors bought it anyway, though, of course, the tech selloff has not been helping things at all. Both AAPL stock and GOOG stock have enjoyed prodigious runs to all-time highs this year, but more so Apple stock which is up an eye-popping 50% over the past 12 months vs. 31.6% by GOOG stock over the timeframe.
Apple shares have racked up gains of 25.2% vs. 20.3% by GOOG stock in the year-to-date with the iPhone 8 euphoria largely to thank for the move. Those are not shabby returns by any stretch of the imagination, which means that investors believe both companies can continue to do well even as they continue encroaching into each other’s markets.
Apple was once considered a bargain due to its cheap valuation. But with shares now trading at more than 17 times this year’s earnings and profits expected to grow just 8% over the next couple of years, that valuation now looks a bit rich. Meanwhile, Apple’s topline growth has turned anemic lately, with growth dipping into negative territory for the first time during the second half of 2016 while margins are contracting.
Google stock, on the other hand, has many of the trappings of a growth stock, never mind that its boasts the second-largest market cap for publicly listed companies in the U.S. Topline growth has averaged 20%-plus over the past 12 months, a considerable improvement from the low-to-mid-teen growth posted over the previous three years. Meanwhile, Wall Street expects Alphabet to grow the bottomline at an impressive 20% annual clip over the next couple of years.
Google implemented some far-reaching changes to its lucrative AdSense program between 2012 and 2014, and it appears to be paying off big dividends as I explained last month. Google cleaned up its house during that campaign, and it appears marketers are enjoying higher ROI from their Google ads and are therefore willing to spend more cash with the search giant. Google’s market position in search ads remains unmatched, and its margins have remained intact.
AAPL Stock Seller’s Remorse
The analysts might have been showboating with their flurry of AAPL stock downgrades, but they appear to have a solid point. A lot of ongoing interest in AAPL stock hinges on the iPhone 8. That’s a risky proposition because any disappointment here is likely to open up huge downside risk for AAPL stock.
It’s a bit like Tesla Inc (NASDAQ:TSLA), whose shares hd enjoyed a wild run-up fueled by Model 3 fever but tanked spectacularly in the space of a week at the first signs of trouble.
Apple shares are up an astonishing 745% since the debut of the first iPhone a decade ago. Meanwhile, GOOG stock is up ”a mere” 245% over the period. Long-term Apple shareholders are likely to get hit big time by seller’s remorse at the prospects of unloading the shares. After all, iPhone 8 could still turn out to be a real winner.
Emotional investing though is frequently a recipe for disaster. At the moment, GOOG stock offers a solid opportunity for capital growth at less risk than AAPL stock. Sell some Apple shares and buy some Alphabet instead.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
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