Is Google Due for an Apple-esque Pullback?

Shares of Apple (NASDAQ: AAPL  ) have now pulled back by nearly 40% from September highs. Plenty of Foolish ink has been spilled documenting the Mac maker's precipitous fall from Wall Street grace. At the same time, both the broader market and mobile rival Google (NASDAQ: GOOGL  ) have continued marching into uncharted territory and tapped all-time highs recently. Any investor that went long Google and short Apple in September would be sitting pretty right about now.

AAPL Chart

AAPL data by YCharts.

Among other reasons, institutional trading has played a large role in this switcheroo, as several large hedge funds were busy frantically unloading their shares last quarter. Meanwhile, the search giant has now surpassed the iPhone maker as the top holding among U.S. mutual funds and hedge funds.

With Google flirting with all-time highs, much like Apple was in September, is the search giant due for an Apple-esque pullback?

Oracle Investment Research thinks the answer is "yes." Chief market strategist Laurence Balter notes that all the conditions surrounding Google are eerily reminiscent of those for Apple six months ago. At the time, analysts were clamoring to see who could assign the highest price target on Apple, with ongoing talk of $1,000 share prices and trillion-dollar market caps. Google is far from reaching a 13-digit valuation, but $1,000 seems just around the corner at this rate.

Balter now has a $700 price target on Google, up from $670. That would represent a pullback of 16% from current prices. That's not nearly as bad as Apple's pullback, but then again no one would have expected a 40% decline.

The strategist notes that Google is now the 10th most expensive stock in the S&P 100, trading at 24.6 times earnings. The search giant has a PEG ratio of 1.2, while Apple's PEG of 0.55 makes it the 5th cheapest in the S&P 500. Google's return on assets has been falling by roughly 6.5% annually while Apple's has been rising by 11.7% annually.

It's worth noting that Oracle came pretty close to calling Apple's top. Exactly a month before shares topped out at $705 in September, Oracle downgraded Apple to "hold" alongside a $650 price target (shares were $660 at the time). Investor expectations were a little too frothy, the firm reckoned. Three months ago, Balter also unsuccessfully attempted to call a bottom on Apple, upgrading shares to a "strong buy" as shares had reached 10-year low in valuation based on its EV/EBITDA.

Balter thinks that investors buying Google at current prices are overpaying. Will he be right?

As one of the most dominant Internet companies ever, Google has made a habit of driving strong returns for its shareholders. However, like many other web companies, it's also struggling to adapt to an increasingly mobile world. Despite gaining an enviable lead with its Android operating system, the market isn't sold. That's why it's more important than ever to understand each piece of Google's sprawling empire. In The Motley Fool's new premium research report on Google, we break down the risks and potential rewards for Google investors. Simply click here now to unlock your copy of this invaluable resource.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 11, 2013, at 9:52 PM, fool94085 wrote:

    Even a toddler can predict that. Google is bound to pull-back. Please sell your shares now.

  • Report this Comment On March 11, 2013, at 10:02 PM, DASPIRITOFTRUTH wrote:

    Google has found out that "austere" measures in a down economy does not work.

    Android phones are available to the poor-just go to Dollar General or Family Dollar.

    What does that mean?

    Well, in a depressed economy-Google will exceed and high priced Apple will not.

    Basically, take care of the poor FIRST then you will be able to reap all of their funds that they receive.

    The time to worry about Google is/was when the economy rebounds without federal aid.

    Until then, Google has a set government subsidized entitlement that will keep their profits and stock price up.

    Simply as that.

  • Report this Comment On March 11, 2013, at 11:56 PM, baozebub wrote:

    I go overseas a lot. In the poorest alleyways, Android rules. In the business lounges, it's all Apple.

    Android users outnumber Apple. But do they make money now or in the future? I have a feeling advertisers will discover that their number of clicks will have a lower and lower return as more and more Android devices get sold.

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