While Apple’s price has dropped, Google’s price has risen. Google has become a new darling, and Apple is experiencing ownership rotation from momentum investors to value investors, and possibly income investors. Microsoft is down on a trailing 1-year basis, but less so than Apple and nothing like the decline in Apple from its September 2012 peak.
Figure 1: Price Chart
Let’s take a look at valuations and expectations for those three companies, who compete in so many ways.
Figures 2, 3, 4 and 5 from YCharts, show Apple to have a lower valuation that either Microsoft or Google by forward P/E estimate, EV/EBITDA, EV/Free Cash Flow and yield.
At some point the attractive valuation multiple should provide some sort of brake on the price decline Apple has been experiencing.
If Apple were to raise its dividend, which is appear well able to do from either cash flow or cash reserves, it could also create a compelling yield opportunity attracting dividend income investors.
Figure 2: Forward P/E Estimate
Figure 3: EV/EBITDA
Figure 4: EV/EBITDA
Figure 5: Yield
Figure 6: Valuation and Options Metrics
Based on options implied volatility for the January 2014 options, Apple as the widest probable percentage price range, while Microsoft and Google have approximately the same probability range. At 2 standard deviations up and down, Apple has an options implied probability range of down 41.69% and up 63.88% (on a 1 standard deviation basis the range is down 24.53% and up 26.50%). Microsoft and Google, however, have an approximate 2 standard deviation down 29% and up 40% range (1 standard deviation down 16% and up 18%)
Options probabilities are non-directional, so other hints are needed to gauge the balance of options traders expectations. The direction of the Put/Call ratio is one helpful hint. The Put/Call ratio shows how much people are buying protection against loss (PUTs) versus buying gain opportunity (CALLs).
On an overall market basis, PUTs tend to outnumber CALLs (ratio greater than 1.00). Here is a chart for SPY, representing the S&P 500, illustrating that point. The ratio is shown in blue in the images below.
Figure 7: SPY Put/Call Ratio
The 1-day Put/Call ratio for Apple is above the 30-day average (a minor negative directional indication), but the 3-year plot of the ratio shows decline in the level of protection seeking behavior.
In any event the ratio is lower than the overall market — possibly due to less protection seeking and possibly due to more opportunity seeking.
Figure 8: Apple Put/Call Ratio
Microsoft’s 1-day Put/Call Ratio is minimal at 0.1 versus a 30-day average of 0.4. The 3-year plot shows a decline in concern for protection versus opportunity. That could be due to more opportunity seeking or less protection seeking, but the ratio shows the balance.
Figure 9: Microsoft Put/Call Ratio
Google’s Put/Call ratio looks more like the typical market, but with a rising level of protection seeking versus opportunity seeking. The 1-day level is 1.1 versus a 30-day level of 1.0. The 3-year chart, shows about a year of rising Put/Call ratios.
Figure 10: Google Put/Call Ratio
Figure 6 shows that Google has more institutional ownership than either Apple or Microsoft, and fewer analysts following it. Google has the lowest percentage gain to the high analyst estimate and the highest percentage loss to the low analyst target; and the lowest percentage change to the average analyst target.
Apple is the opposite with the highest percent to the high and the lowest percent to the low.
Microsoft is between the two.
Also in Figure 6, the dispersion of Buy, Outperform, Hold, Underperform and Sell for the three stocks shows only Apple having any Underperform or Sell recommendations (5.26% combined), but also the highest portion of Buy or Outperform (75.44% combined).
Google by contrast has 65.79% combined Buy and Outperform, and Microsoft has 59.46%.
Looking at the high, low and average 12-month analyst target prices as an 18-month time series, you see Apple with a recently declining set of averages, and a narrowing high to low range. The upgrades to estimates were mostly over by mid-2012. The downgrades were mostly over by January 2013.
Figure 11: Analyst Opinions Time Series for Apple
Microsoft’s targets are minimally changed since early-mid 2012 and have been in a fairly constant size range from high to low. Downgrades for Microsoft are also minimal at this time.
Figure 12: Analyst Opinions Time Series for Microsoft
Google is still getting upgrades and has a rising average target price and high target.
Figure 13: Analyst Opinions Time Series for Google
Figure 6 shows that S&P has similar 3-year estimated EPS growth projections for Google and Apple (9% and 10% respectively), an a lower 6% for Microsoft. Comparing the forward P/E estimate to the projected growth rate, you see a PEG of about 1 for Apple, 1.6 for Microsoft and 1.9 for Google.
In terms of S&P current Fair Value, Figure 6 data for market price and Fair Values indicates undervaluation of 13% for Apple, 16% for Google and 27% for Microsoft.
S&P expects both Apple and Microsoft to strongly outperform the S&P 500 in the year ahead, and Google to be only a market performer.
Each stock offers distinctly different risks and opportunities.
Google poses the greatest disappointment risk and Apple the least.
Google is the momentum play and Apple is the “falling knife” that on paper is a great value, and a pretty good yield.
Microsoft is comparatively price stable with an above average yield, and perhaps more risk adjusted upside potential than Google.
Looking at risk and risk adjusted return, here are the 3-year Beta and 3-year Sharpe Ratio metrics for each stock as of January 31, 2013:
- AAPL: Beta 0.75 Sharpe 1.22
- MSFT: Beta 1.17 Sharpe 0.54
- GOOG: Beta 1.12 Sharpe 0.18
We own some Apple and some Microsoft.