Finding someone who doesn’t believe the iPhone hype is not an easy task these days.
But Arnie Berman, the chief technology analyst at investment bank Cowen, has an interesting take on the iPhone and all the talk about how it will revolutionize the mobile Internet. He thinks investors should sell Apple (AAPL), whose stock has surged 35 percent in the past 2 months, and buy Google (GOOG) instead.
In a report to clients Friday morning, Berman argues that Google stands to benefit as much, if not more, from the mobile Web becoming a reality than Apple.
“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 wrote. “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.”
Berman’s contention is that if more and more people use their cell phones as devices to access the Web, Google winds up a winner because it should be able to capitalize on increased mobile search revenue. And the beauty for Google is that it doesn’t have to make a bet on hardware or carriers. As long as people use their handset, be it an iPhone, the latest device from Palm (PALM), Motorola (MOT) or Nokia (NOK) or even a BlackBerry from Research in Motion (RIMM), to do searches, Google should win.
“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 wrote, adding later on his report 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.”
Berman also points out that Google and Apple now trade at the same price-to-earnings ratio, about 33 times earnings estimates for the next four quarters. That, he says, just defies logic considering that Google is a more profitable company that is growing faster than Apple.
“Should Apple and Google trade at the same valuations? We think the correct answer to this question is ‘absolutely not.’ Growth, risk and return are the holy trinity of corporate financial performance. Google trounces Apple in 2 categories – with vastly superior growth and a less risky business model. In the third category (return –measured here using both ROA and ROE), Google again trumps Apple – but by a smaller degree,” he wrote.
And Berman makes yet another interesting point about how iPhone hype has had an absurd impact on Apple’s stock. He argues that most of Apple’s appreciation during the past two months is due to the iPhone. That’s probably valid. And the run-up in Apple’s stock price has added $24 billion to the company’s enterprise value, which is equal to a company’s market value minus its cash but including debt and preferred stock.
So if you assume that the market believes iPhone is worth $24 billion in value to Apple’s stock, then this, Berman points out, means that the iPhone is worth two-thirds as much as all of Motorola and a third as much as Nokia. Is that reasonable? Even if Apple blows past its public goal of selling 10 million iPhones by the end of 2008, which Berman thinks it could, it still wouldn’t be enough to justify the stock’s run.
“Even under the most optimistic scenario, iPhone volumes will be paltry relative to MOT and NOK. These companies have operator relationships all over the planet - and will ship a combined total of roughly 650 million handsets in 2008,” Berman wrote, adding that Apple would need to sell over 600 million iPhones in the next 5 years in order for its iPhone business to deserve a valuation similar to Nokia’s. No matter how successful the iPhone is, 600 million sold in five years is extremely unlikely.
Don’t get me wrong. This is not to say that the iPhone won’t be cool. I’m no Apple hater. If it weren’t for the fact that I live in New York and AT&T’s (T) coverage is pretty abysmal here, I’d consider buying one. But the notion that Apple will revolutionize the mobile Web and dominate it the way it does with the music player market rings a little false. And as Berman wisely points out, there are plenty of other ways to play this trend that give investors a better bang for their buck.
source : cnn.money.com
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