Is Google More Innovative Than Apple?

With shares of Google Inc. (NASDAQ:GOOG) trading at around $915, is GOOG an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Apple Inc. (NASDAQ:AAPL) still gets all the recognition for being the most innovative company in the world, but is that really still the case? While Google might not be the most innovative company in the world, it’s definitely toward the top of the list. And whether or not it’s more innovative than Apple is arguable. However, that doesn’t mean all innovations will be a success.

For instance, Google Glass hasn’t received rave reviews thus far. Technology gurus who have reviewed the product have stated that the functionality is underwhelming, and that Google Glass isn’t worth the $1,500 price tag. Apparently, Google Glass is great for navigation. You can also have emails and texts read to you. Search is possible, but you can’t watch videos. The battery life is five hours, but Google recommends that you only wear the glasses for one hour per day to avoid eye strain. The focal length can’t be adjusted, which is a negative, as it will limit the product’s potential in regards to consumer interest. Google Glass has a durable and somewhat bendable titanium band, but it doesn’t fold up. Therefore, you can’t put it in your pocket. Google provides a carry bag. One big issue that keeps coming up is privacy. Since no light appears when you’re recording, no one knows when they’re being taped. This has the potential to lead to many problems. However, it’s also an easy fix. The consensus has been that many people are misinterpreting the product’s potential. It might not be a big hit with the average consumer, but it does have a lot of potential in the military, health care, education, and many other industries.

Another popular topic for Google has been its YouTube subscription service. Those interested will pay a monthly fee that starts at $0.99 per month and averages $2.99 per month. Discounts are available for those who choose an annual subscription. The goal is to increase revenue for YouTube as well as content creators. If successful, more channels might be interested in joining. Don’t worry, free videos will not be affected. They will still be free. This is just for premium content.

In regards to traffic, Google is ranked #1 globally as well as #1 in the United States. As long as that remains to be the case, the company’s potential is phenomenal. Remember, the Internet is still growing, which means more consumers are searching by the day. Over the past three months for Google.com, pageviews-per-user have increased 6.98 percent, time-on-site has increased 3 percent, and the bounce rate (one page per view) has declined 2 percent. There doesn’t seem to be any slowdown on the horizon.

The company culture at Google is excellent. This should come as no surprise. The strongest companies often have impressive company cultures. According to Glassdoor.com, Google employees have rated their employer a 4.1 of 5. An impressive 91 percent of employees would recommend the company to a friend, and 95 percent of employees approve of CEO Larry Page.

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The chart below compares fundamentals for Google, Apple, and Amazon.com Inc. (NASDAQ:AMZN).

GOOG AAPL AMZN
Trailing P/E 27.10 10.38 N/A
Forward P/E 17.04 9.86 81.76
Profit Margin 20.92% 23.46% -0.14%
ROE 16.36% 33.34% -1.11%
Operating Cash Flow 16.56B 55.26B 4.25B
Dividend Yield N/A 2.70% N/A
Short Position 1.50% 4.40% 1.70%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

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T = Technicals Are Strong

Everyone likes to talk about Apple, but the savviest investors have chosen Google in recent years. These investors knew that Google had more future potential through innovation. Google has outperformed Apple for every time frame listed below.

At $905.14, Google is trading well above its averages.

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1 Month Year-To-Date 1 Year 3 Year
GOOG 14.58% 27.97% 49.88% 78.37%
AAPL 1.81% -17.30% -20.46% 74.94%
AMZN -1.87% 6.73% 20.11% 108.3%
50-Day SMA 815.28
200-Day SMA 758.62

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Google is right at the industry average of 0.10. Debt is definitely not a concern. And all that cash allows for almost limitless opportunities. However, the same can be said for Apple.

Debt-To-Equity Cash Long-Term Debt
GOOG 0.10 50.10B 7.38B
AAPL 0.00 39.14B 0.00
AMZN 0.36 7.90B 3.04B

E = Earnings Have Been Steady

Google delivers monstrous profits every year. Unlike many companies throughout the broader market that are cutting costs to improve the bottom line after seeing declining revenues, Google’s revenue story continues to impress.

When we look at the last quarter on a year-over-year basis, we see significant improvements in revenue and earnings. Revenue and earnings have also improved on a sequential basis.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in billions 21.80 23.65 29.32 37.90 50.18
Diluted EPS ($) 13.31 20.41 26.31 29.76 32.31
Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in billions 10.64 12.21 14.10 13.22 13.97
Diluted EPS ($) 8.75 8.42 6.53 9.257 9.94

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

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T = Trends Support the Industry

Internet information providers? Mobile? Online video streaming? Wearable computers? These might not all qualify as industries, but you get the point. Google is involved in so many different areas that trends are likely to support the industry somewhere.

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Conclusion

Is Google more innovative than Apple? As stated earlier, an argument can be made. We’ll find out more later today from the annual Google I/O conference.

Google Glass might not be as popular as expected, but Google has many other successes, including but not limited to Android, YouTube, and search. Google is also cash-rich, which will allow for future innovations. The opportunities will be bound. There will be hits and misses, but gains from hits should outweigh hits from losses.

Google has very healthy margins, tremendous cash flow, consistent stock performance, exceptional debt management, and impressive annual revenue and earnings growth. Top-tier management also helps.

Google has been rated an OUTPERFORM here since December 2012. It remains an OUTPERFORM. If the broader market continues its rally, than $1000 per share is a realistic possibility.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.