updated 07:11 pm EST, Wed March 6, 2013
Run-up is based on expectation of 'tailwind' effect rather than numbers
Investors are running away from Apple and towards Google because the former lacks "certainty" while the latter is expected to grow its share of the expanding web-advertising market, resulting in the largest gap in price-to-earnings ratio between the two companies since June 2005. While Apple is still valued more than $100 billion more than Google, the web advertising giant's stock price is considerably higher than Apple's and gaining, whereas AAPL has endured a steady malaise since it hit an all-time high last fall.
On its face, the flock to GOOG wouldn't appear to make sense compared to AAPL -- Google is trading at a P/E ratio of 25 compared to Apple's P/E of 10, Google's stock is expensive while Apple's hasn't been this cheap in over a year, and Apple continues to see high demand for its profitable products and services, while Google has lost billions on Android -- but the move is more a matter of investors perceiving growth opportunities in Google's core business, which is web advertising. The market for web ads is expected to reach over $37 billion this year, and Google commands around 40 percent of it in the US market. Analysts believe the company is positioned to expand its reach in mobile, video, local and social web advertising alongside the growth of those services, Bloomberg reports.
Apple is seen as undergoing a slowing of its previously-phenomenal revenue growth -- though still growing -- with its margins decreasing slightly as it introduced wildly-popular but less profitable products such as the iPad mini. Advertising and other services, which Google has built its business on, are now seen as a more predictable business model than the innovative consumer electronics path, which carries with it a risk of failure (such as the Android tablet market, or BlackBerry's PlayBook).
Analysts are unsure if the products in Apple's pipeline -- which would mostly consist of refinements and new models of existing products -- will continue the company's growth path. Rumors of lower-cost iPhones or revamped iPads may not be sufficient to significantly expand the company's base.
Investors appear to be attracted to Google's Android OS for smartphones, which has achieved a majority share of the overall smartphone market (but is actually still losing share to Apple in the US) -- however, despite the penetration of Android, the OS doesn't make any money for Google except by way of increasing its advertising reach. Google also has yet to justify it's $12.5 billion purchase of Motorola Mobility with any hit hardware products, US sales were down in the last report quarter, and the core business -- advertising -- is only expected to grow one percent next year.
Meanwhile, Apple continues to increase sales of its leading products, and in the previous quarter only reported lower sales on products it simply couldn't make fast enough -- specifically the latest iMac along with the iPad mini. Should any of the myriad new product rumors turn out to be accurate -- the long-awaited HDTV, the later "iWatch," the cheaper iPhone for prepaid markets, the alleged "subscription streaming" music service, or an expansion of iCloud services -- it would add to Apple's already record-setting revenues and profits.
Google's growth, while smaller, is seen by investors as more predictable -- perhaps in part a reaction to the increase in government and economic uncertainty. The overall US economy is still sluggish, and the government seems bogged down in partisan inaction.
Advertising dollars are seen to be increasing moving to digital over print -- 2013 will likely be the year online advertising ad buys surpass those of print -- and Google is well-positioned to grow alongside that shift, what investors call a "tailwind" effect. Apple, though it outperforms in most areas, still has questions hanging over it of whether it can continue to innovate in the way the company did when co-founder Steve Jobs was CEO.