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I know. I know. I know. Apple (AAPL) reaching $600 before Google (GOOG) sounds absurd. Google which closed at $532.25 / share on Friday only needs to appreciate 12.7% to hit $600, while Apple at 360.25 /share would need to increase 66.5%. As crazy as it sounds, if Apple outperforms Google at the same rate as last year it is doable. In 2010, Apple outperformed Google by 57.3%. Duplicating that performance, starting now, gets Apple there first. So, based on past performance it's possible. However, that's not why I am writing this article. Two reports released Friday morning – got me thinking about this.
First, Morgan Stanley downgraded Google from $645 to $600. The report was brutal.
Debate #1: Will margins decline from here? Yes.Debate #2: Will "newer" businesses drive near-term revenue outperformance? No.Debate #3: Will
investments in local eCommerce and / or social pay-off? Too early to tell.
As a Result, We Are Reducing Our Estimates:
We are reducing our profitability estimates (now significantly lower than consensus) due to the following: 1) Google's aggressive hiring plans, 2) rising salaries due to a competitive hiring environment, and 3) increased advertising spend to drive usage of new / existing products.
In 2011, Morgan Stanley expects search & contextual ads to contribute ~90% of Google's net revenue. Thus all other businesses such as DoubleClick, YouTube, AdMob, Android Market, and mobile search will only contribute 10% of revenue. It is simply not a good business practice for a company to be so reliant on one revenue source. Interestingly this is by design and may become their achilles heel.
Google is an advertising company "fronting" as technology company. Its reason for existence is to get as much advertising in front of as many people as possible. This changes the traditional technology game from providing the "best product at the best price possible" to providing the "cheapest ‘good enough' product possible."
No one that has used Excel extensively will tell you that Google Docs is better. However, 90% of the time Google Docs is good enough – especially since it's free. That simply kills the price that Microsoft can charge for Excel. Most people will say – who cares it's time for Microsoft to get its comeuppance. Yea, but what about the start up that had a more innovative spreadsheet program that couldn't compete with free?
Google employs this strategy down its entire product line – that's why the other products only bring in 10% of its revenue. However, they can only play this game as long as the cash cow (desktop search advertising) is providing milk. As the market trends away from desktop computing to mobile, the Street is becoming less convinced that Google can commoditize the mobile market and stuff it with ads before the cash cow runs dry. At least that's part of the reason for the Morgan Stanley downgrade.
The second report that I read was speculation that Apple had just inked an iPhone deal with China Mobile. China Mobile is the world's largest wireless carrier with over 611M subscribers. Brian White, Ticonderoga Securities' chief Apple analyst, has a boilerplate sentence stored on his computer that goes like this:
We believe the ramp of the mobile Internet in China will be one of the great wonders of the tech world over the next decade and the country has clearly caught "Apple fever" that we believe will only accelerate as the company expands it carrier base to include both China Mobile and China Telecom.
If the deal is struck, Ticonderoga Securities thinks Apple's stock could skyrocket north of $600.
There you have it. Two different Wall Street analysts with $600 targets on both companies. As well as, the math based on last year's performance showing that it's possible for Apple to get there first. Of course, you still don't believe it – but that's what makes a market.
Disclosure: Long Apple and Short Google. Positions may changed at any time.
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