The iPhone’s solid start can be attributed to a number of things from technology to marketing to Jobs, however savvy investors must sell their Apple stock now and invest in Google and this is why:
Google Benefits Most
Everyone believes that the iPhone will revolutionize the mobile internet, however Google stands to benefit as much, if not more from the mobile Web opportunities than Apple. Arnie Berman, the chief technology analyst at investment bank Cowan first commented on this reality prior to the iPhone’s launch.
Berman stated that, “At this stage we would rather commit fresh capital to stocks that have not already been bid up in paroxysms of excitement over the ‘mobile Internet. Berman went on to say, “Apple shares have already benefited from a powerful hype cycle. In the months to come, Google is the much stronger candidate to benefit from a hype cycle whose DNA is similar to the one that has propelled Apple’s share price to dizzying heights.”
Monetization of Search Traffic
The statements made by Berman and now echoed throughout the technology community indicate that if an increasing number of people use their mobile phones to access the Internet, Google becomes the ultimate winner because Google will be able to significantly monetize the increased mobile search traffic. Even sweeter for Google is that Google does not have to invest in hardware or partner with carriers. Google will win as people use their phone whether it is a Motorla, Palm, Nokia or Blackberry.
Berman went on to state that “google’s ability to capitalize on the emergence of a pervasive high bandwidth mobile Internet is much more assured than Apple’s ability to do so,” Berman also pointed out that “the hardware business is inherently more unpredictable than the atomistic revenue streams associated with search. In our view, Apple remains a hits company. In fact, Apple is just one product cycle miss away from being treated with all the love and tenderness institutional investors reserve for Motorola.”
Google More Profitable
Examining the financial trading also shows a greater potential for Google considering Google and Apple are currently trading at the same price to earnings ratio. This ratio is approximately 33 times earnings estimates for the upcoming four quarters. Berman, says that this fact defies logic because Google is a much more profitable company and is growing much faster than Apple.
Google and Apple should not be trading at the same valuations. As Berman points out, Risk, Growth and Return are of paramount importance for corporate financial performance. Google destroys Apple in two categories including enormously exceptional growth and a much less risky overall business model. Regarding the third category, Return (measured using both ROE and ROA), Google defeats Apple again, by a slightly smaller degree.
The iPhone Effect
Another key point made by Berman is that the iPhone hype has had a ridiculous positive affect on Apple’s stock. In fact the majority of Apple’s appreciation during the past two months was directly because of the iPhone. This hype resulted in Apple’s stock price increase and added roughly $24 billion to Apple’s business enterprise value. The enterprise value is equal to a corporation’s market value minus its liquid cash but including preferred stock and debt.
Taking Berman’s statements and applying them to practice indicates that the market believes that the iPhone is worth $24 billion in overall value to Apple’s stock and therefore the iPhone is worth approximately two thirds as much as Motorola and a third as much as Nokia. Therefore, even if Apple reaches its goal of placing 10 million iPhones in the market by the end of 2008, which could happen, this still would not justify the stock’s increase.
The iPhone will hardly have a significant impact even in the most optimistic situation for Apple because Motorola and Nokia have a global relationship with consumers. Motorola and Nokia have reported that they will ship a combined total of over 650 million phones in 2008. Therefore no matter how successful the iPhone is, in order to have a similar valuation of Nokia or Motorola, Apple would need to sell at least 600 million iPhones over the next five years. This will not happen.
In Summary
Personally, I do like the iPhone, but as most believe it is over hyped. As usual, Apple has done a great job marketing and promoting the product. I don’t believe that the iPhone will revolutionize the mobile market place, but I do believe there will be some improvements overall. Additionally, as pointed out there are much better places to place your money and invest for success like Google.
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