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In Google We Trust?

15 March 2013 in Trading Ideas

Remember Apple (AAPL)? It seems just like yesterday that the longtime tech darling was sitting atop the market capitalization mountain, with its share price surpassing $700, on its way to the inevitable $1,000 levels.

Unfortunately for those investing in Apple, that “yesterday” was six months ago, and since then, Apple shares have, to put it kindly, slumped – falling nearly 40%.

Ironically enough, as Apple’s stock was losing its grip on $700, Google (GOOG) shares were charging above the same mark, eventually crossing $840 earlier this month, and taking the lead role in the investing community’s production of “Can This Stock Hit $1,000?”

The point was driven home by the recent news that the valuation gap between the shares of the two companies – Google’s price-to-earnings ratio is 25, Apple’s is now less than 10 – is the widest it’s been since June 2005.1

As Bloomberg reported, while Apple has made investors fret with slowing growth and declining margins, Google has been flexing its muscles in its core Web search business, where it commands a 67% share of the market, and in smartphone software, with its 70% market share.

Google’s runup has also contributed to the performance of the Onward Online Ads motif, which is up 8.1% this year. It is off 0.2% in the past 12 months.

However, a larger question now facing investors is determining how much of Google’s recent rise comes from the search giant’s dominance, and how much suggests a boom in online advertising as a whole.

That brings the inevitable follow-up question: Is Google’s runup doing anything for online ad players Facebook (FB) and Yahoo (YHOO)?

That’s a harder question to answer – even when you consider at the nearly identical 25% or so performance by all three of these stocks in the past three months.

Both Facebook and Yahoo, one could argue, are benefiting from recent slumps in investor perception – Facebook, following its hyped-and-anti-climactic IPO last year, and Yahoo, after years of relative irrelevancy in the tech sector. It’s worth noting that Facebook shares are down 12% in the past six weeks since hitting a six-month high, while Google is up 10% in that same period.

And let’s not forget that there is a competition going on here. Bloomberg reported Google surpassed Facebook last year in the online display-ad market, and is expected to grow its share by three percentage points to 21% by 2014. Those three points are coming from somewhere.

But it works both ways: Facebook, with its Exchange service, is hoping to drive more revenue with a program allowing advertisers better targeting strategies.

Ultimately, investors will be forced to decide whether Google’s ongoing success expands or limits opportunities to profit in anything besides Google.

1Brian Womack, “Google-Apple Valuation Gap Widest Since 2005,” Bloomberg News, March 6, 2013, http://www.bloomberg.com/news/2013-03-06/google-apple-valuation-gap-widest-since-2005-on-ads.html”, (accessed March 12, 2013).

Tags: Apple, Google