Google vs. Apple

The pounding of the hoofs on the
raw sods
stayed with me half through the night.
I awoke smiling but tired.

-- From "April," by William Carlos Williams

The pounding of the hoofs is almost over. March Madness has turned to April showers, and soon the champions get their crowns. In basketball, the final showdown is between Memphis and Kansas; for investors, the choice stands between Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL).

To me, the choice is clear. Let's see whether I can convince you, too.

Back to basics
This is probably the most direct face-to-face competition we've seen in this entire tournament. A CAPS player that likes either Apple or Google is also likely to give the other stock a thumbs-up, and vice versa for bears. Curiously, Microsoft (Nasdaq: MSFT) also joins in this parallel grading party, which makes the terrible trio natural rivals for the same investors' funds.

With the similarities out of the way, we'll have a look at what sets Google apart. There are many numerical reasons to prefer the online giant over its stylish gadget-guru opponent. Here's a taste:

Google

Apple

Operating Margin

31%

20%

3-Year Annual Revenue Growth

73%

40%

3-Year Annual Free Cash Flow Growth

108%

48%

Forward P/E Ratio

20

25

PEG Ratio

0.78

1.32

Data taken from Capital IQ (a division of Standard & Poor's) and Yahoo! Finance.

From this, you can tell that Google is growing much more quickly than Apple and that its shares are on sale for a much more generous price. A PEG ratio below 0.8 might even attract a few value investors, though the big G-man remains a solid growth stock through-and-through.

It's all about the Benjamins
Today, Apple creates about $2.9 billion a year of free-flowing cash, according to Capital IQ, while Google can muster only $1.2 billion. But the search giant has more than doubled its free cash every year lately, while Apple "only" tacked on about 50% more on average, as the iPod phenomenon and reimagined iMacs took off three years ago. And there are reasons to believe that the divergent growth rates will move even further apart in the future.

Apple is the older business here, and its operations have matured over the years. Google, on the other hand, is still building a global infrastructure for future needs and will continue to have massive capital expenditures over the next few years. If or when Google finally scales up to the appropriate level (ask Eric, Sergei, and Larry what that might be), the capital expenditures will fall off and free cash flows will explode. But at the current rate, Google will overtake Apple in the cash cow race in a scant two years.

Since the value of a company should correspond to its future cash-generating powers, it stands to reason that Google should command the higher P/E ratio and other traditional valuation metrics right now. But it doesn't. A tiny bit of bad news on ad-click trends got blown way out of proportion and shaved almost $93 billion off Google's market cap between late December and early March. If defense wins championships, then unfair discounts like this one build nest eggs. There's just no way for this ridiculous undervaluation to last for more than maybe a couple of quarters, as Google starts to show why the adjustments it made to advertising policies adds value over the long term rather than destroying it.

Final whistle
There are no Cinderella teams in this final game; both contenders truly deserve the national spotlight. But Google should run away with this decision, based on it's raw cash-generating power and a superior starting position. Here's where I'll make a no-look elbow pass to you, the reader: Roll over to Motley Fool CAPS, give Google a thumbs-up rating, and it's a slam-dunk win for the home team.

If all goes well, the pounding of the hoofs on hardwood fades away until next year, and Google lifts the trophy smiling but tired.

Further Foolishness:

Who's going to win the Apple-Google showdown and take home the 2008 Stock Madness trophy? See how we got here, and don't forget to vote in CAPS!

Apple is a current Motley Fool Stock Advisor pick and Microsoft is a Motley Fool Inside Value recommendation.

Fool contributor Anders Bylund is a Google shareholder but holds no position in any of the other companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure can pick and roll with the best of 'em.