Wednesday, August 12, 2009

The "I Love Apple" Price Premium

This morning 24/7 Wall Street notes that the market value of APPL is now greater than the market value of Google.  But, I ask the question, if you had the option to buy all of APPL for 148 Billion Dollars or if you could spend 143 of billions to buy Google and retain the other 5 billion, which would you do?

The ultimate conclusion of the writer was that the "market knows".  How silly!  If he believes in EMH (efficient market hypothesis) then why bother to express an opinion?

His logic is that since Google sells for less, it must be because AAPL is worth more.  It must be worth more because Apple has a lock on the iPod, iTune markets and is taking browser share from Microsoft and because Google's business of selling desk top software is a lousy business.

Some of the above is the shooting of a rifle at where the target is rather than where it is going.  The targets in question are moving like doves, not like deer.  It is difficult to shoot a dove with a rifle.

Google will begin the roll out of Google Wave next month but the hype is about the pending announcement of an Apple tablet computer.  Google Books and later Google Wave will make the Apple tablet a compelling device to own but these Google products will not be limited to operating on the Apple tablet.

The 24/7 article ( notes that Google's profit margin is 60% of revenues!  It notes that the margins for hardware are much lower.  Still, Apple manages to make about 30%!

My take is that the reason people are willing to pay more for 30% profits than for 60% profits is "The I Love APPL" premium.  Apple has without doubt produced some neat gadgets.  People are in love with Apple Gadgets.

But, if you want to see market share growth in the cell phone business, you have to take a look at Google.  There were no Google phones 15 months ago.  Today, cozens of manufacturers, including HTC, Motorola and Samsung, are in the process of rolling out Google phone models.

Why is Google having such great success getting phones made?  They are making Apple an easy target for dozens of competitors.  And, while it is true that Google is giving manufacturers "free" software, that is not the biggest of the financial incentives offered by Google. Consumers will save $20 or more per month for life by buying Google phones.  AT&T, Verizon and others do not want their cell phone services to be "dumb pipes".  They want to be the gatekeepers, where consumers are charged extra for no cost services such as text messaging.  A significant percentage of the population is holding out to have access to the web without paying extra fees for proprietary services.

Ralph Waldo Emerson gave us the adage that if you build a better mousetrap the world will beat a path to your door.  Google and Apple are both trying to build mousetraps.  Apple wants us to buy iPhone's because iPhone buyers are likely to buy apps, music, videos and more.  Google is willing to give away software in order to gain access to eyeballs.  Google is a technologically advanced advertising company.  It's products tend to be better but especially better for FREE!

Apple, Sony, Amazon and many others are going to offer some really nice reading tablets.  Apple's tablet will be first rate.  However, the longer term question relates to what media is purchased via the tablets.  If a significant number of consumers read some of the millions of free books that will be made available via Google, these consumers will be exposed to millions of dollars worth of advertising.

Besides, the price history of devices is a story of decline.  Calculators that once cost more than $1,000 are routinely sold for $7.  Pitiful cell phones once sold for $2,000 or more and better ones are now given away free.  50 inch flat screen TV's that once sold for $10,000 can now be had for $900.  Very large hard drives that once sold for $10,000 or more have been replaced by hard drives that hold many times the data, are many times as fast and sell of under $100.  Apple makes good hardware but there is a flood of good hardware coming to market.

The time to buy Google shares is now.  The time to sell Apple shares will be around the time the greatly hyped tablet comes to market.  (The reason to hold Apple as a long term core holding is because of Apple's success in the iTunes market.  Rumor has it that iTunes is about to be made available across multiple platforms, that it will add social networking features and that its payment system will be made useful for buying other "stuff").

Google, Apple and Amazon shares all carry premium prices because the rapid growth in Internet use is about to shift into a gear we have never seen before.  In some ways, the Internet was kicked into reverse by the bursting of the Internet 1.0 bubble in 2000.  It has taken 9 years for the market to recover.  The next 9 years will be a remarkable time in the history of the world.