Why You Should Buy Google, Maybe Buy Oracle, and Ignore Apple and Microsoft (AAPL, ORCL, MSFT, GOOG)

Microsoft now sells hardware and mobile phone operating systems. Google sells mobile phones (via Motorola), offers the dominant operating system Android for free, and even computers with its own Chrome operating system. Oracle sponsors “Open Office” software that competes with Mircosoft’s Office Suite. Apple may have its own search engine one day.

In this comparison of tech titans, whose respective tech businesses are slowly converging upon each other, I have to give the edge to Google, because it is the cheapest of the stocks with respect to growth, with Oracle a close second. This may seem wrong, given the high P/E, high P/S, lack of dividend, etc., but bear with me and I might prove it to you.

Looking at these stocks side by side is informative. The table below shows Google to be the least attractive company using traditional valuation metrics. Apple looks the most favorable with a nice dividend, low PE, etc.

Stock PE Price/Sales Div Yield Volatility
MSFT 14.28 4 1.8% 0.23
AAPL 13.1 2.7 2.3% 0.26
GOOG 28.1 6 N/A 0.33
ORCL 15.04 4.3 1.2% 0.16

Now allow me to claim that Google is actually the cheapest. Here is my metric, one that I learned from Jim Cramer, Phil Town, and others, and have found to be one of the more accurate types of metrics with regard to measuring a stocks ‘cheapness’ and realistic price potential. Stocks trade on growth, expected future growth, and changes in perceptions in future growth. With that in mind, a stock will trade roughly with a PE either 1 to 2 times its growth rate. 1 times the growth rate is cheap while 2 times the growth rate is expensive. In that light consider the following tables and try to pick a growth rate for each company, bearing in mind the variability inherent in predictions like this.

Stock EPS Qtr. On Qtr. Growth Rev Qtr. On Qtr. Growth
MSFT 17%   10/2013
N/A   7/2013
20%   4/2013
-2.6%   1/2013
15.7%   10/2013
10.2%   7/2013
17.7%   4/2013
2.8%   1/2013
AAPL -4.7%   10/2013
-19.8%   7/2013
-18%   4/2013
-0.4%   1/2013
4.2%   10/2013
0.9%   7/2013
11.3%   4/2013
17.7%   1/2013
GOOG 34%   10/2013
13.3%   7/2013
13.6%   4/2013
17.1%   1/2013
12%   10/2013
19.4%   7/2013
31.3%   4/2013
36.3%   1/2013
ORCL 14.6%   9/2013
16.5%   6/2013
6.1%   3/2013
23.3%   12/2012
2.3%   9/2013
0.3%   6/2013
-0.9%   3/2013
3.4%   12/2012

Now check out future growth:

Stock Current Qtr
EPS Growth
Forecast
Next Qtr
EPS Growth
Forecast
Current Qtr
Rev Growth
Forecast
Next Qtr
Rev Growth
Forecast
MSFT 5.3% ( High )
-9.2% ( Ave. )
-26.3% ( Low )
0% ( High )
-8.3% ( Ave. )
-16.7% ( Low )
13.2% ( High )
10.3% ( Ave. )
8.4% ( Low )
4% ( High )
-0.2% ( Ave. )
-3.8% ( Low )
AAPL 6.8% ( High )
1.2% ( Ave. )
-2.3% ( Low )
17.8% ( High )
6.7% ( Ave. )
-11.3% ( Low )
8.8% ( High )
4.9% ( Ave. )
1.8% ( Low )
13% ( High )
4.3% ( Ave. )
-2.4% ( Low )
GOOG 47.7% ( High )
32% ( Ave. )
9.6% ( Low )
38.9% ( High )
23.3% ( Ave. )
5.3% ( Low )
28% ( High )
15.7% ( Ave. )
8.8% ( Low )
20.3% ( High )
16.3% ( Ave. )
13.1% ( Low )
ORCL 30.2% ( High )
26.4% ( Ave. )
18.9% ( Low )
38.5% ( High )
34.6% ( Ave. )
28.8% ( Low )
2.6% ( High )
0.9% ( Ave. )
0.1% ( Low )
6.8% ( High )
4.5% ( Ave. )
2.3% ( Low )

Using my own averaging techniques, and merging forecasts I conclude that Google is actually the cheapest, followed by Oracle, while Apple and Microsoft pull up the rear. I give Google a growth rate of 24% with a PE of 28 times earnings, meaning that it is trading a little over 1 times its growth rate. For Oracle, I put growth at 23%, with a PE of 15. Which makes it more favorable, but I put it second due to its relatively weak sales outlook. Apple’s growth I peg at about 5%, making it expensive at over 2 times its growth rate. MSFT will likely experience negative EPS growth, causing a breakdown in the valuation metric itself, but also making it a looser in this competition.

The chart below shows Google’s and Oracle’s Quarter on Quarter Growth chart, with future earnings plotted.

Source: QoQ Charts

Source: QoQ Charts
Now the technicals …

All of these stocks have run the past few months, concurrent with the general bull market, but Oracle and Microsoft are both a bit overbought at this point, and the short term technicals are shouting a warning sign. Google shot up on earnings recently, which makes it a bit dangerous. However it has held the price level for a while now.
MSFT

Microsoft has really shot up the past few days (actually, they have all had a few good months), despite the awful outlook I mentioned. I see this as a fluke and look for it come below the 10-day smooth moving average that I’ve plotted. I see it revisting the $36.5 – $37 level in the next few days. If you really want to get in the stock, don’t pay up right now.

GOOG

Google looks good at $1010.00 if you are trying to time the entry.

ORCL

 
Oracle is at the upper part of a channel. I’d look for it to fall a bit to the middle of the channel for an entry.

Finally, a couple of caveats. Google is a high multiple stock. It will continue to be a high multiple stock as long as its growth and perceived growth remain strong (as it is now). Google is more riskly – it is more volatile, has no dividend, and is growing awfully fast for such a large company. This could easily stop. Earnings forecast are often wrong and you can see the variance in predictions above. In short, Google is both high risk, but high reward. Go with Oracle if you want to be more conservative, but avoid Microsoft and Apple.

Hope this helps.