After falling as Google surged from 2012-2013, Apple stock has spiked in 2014. Google stock, on the other hand, recently slid into negative territory year to date.
Here are three causes for this reversal of fortunes.
1) Significant multiple expansion at Apple
Although other factors clearly contributed, the increasing premium the Street placed on Apple stock goes a long way in explaining why the company outperformed both Google and the broad market this year.
The 31% increase in Apple's price-to-earnings ratio to date this year, from 13.5 times to roughly 17.5 times, has been the primary contributor to the stock's 42% rise in 2014. The factors that drove Apple's multiple expansion are largely twofold.
The first involves the reversal of much of the bearishness surrounding Apple stock from a year ago. Rewinding to that point in time, Apple's financial performance was under pressure and uncertainty regarding its future abounded. Earning per share declined in all four of Apple's quarters in fiscal 2013, and Google's Android mobile operating system was stealing market share at a voracious pace. In that context, the premium the market placed on Apple contracted markedly, which laid the foundation for the multiple expansion we witnessed as Apple's financial performance and outlook improved this year.
2) The Apple iPhone 6
Apple's recently concluded fiscal 2014 proved markedly better than 2013, which also played a role in that multiple expansion. However, it's also worth noting that valuation metrics such as P/E multiples are partly influenced by future expectations of a company's performance, although it's an open debate as to just how much. Either way, the absolutely massive financial windfall the new iPhone 6 is widely expected to generate for Apple inarguably also played a key role in the company's 2014 rally.
The iPhone 6 will in all likelihood set new records for virtually every financial metric at Apple during its current fiscal year. You can take that to the bank. Again, as in the case of Apple's multiple expansion, the reasons for the upcoming iPhone 6 windfall are manifold. Let's quickly examine two.
The first, and lesser in my mind, is distribution. Apple in recent years has consistently increased the number of carriers that sell the iPhone. Some are large, such as China Mobile, and others are small. In any case, Apple will sell more iPhones than ever before in part because more people than ever before are able to buy them. The second, and I believe vastly more important, reason is Apple's much-discussed iPhone upgrade cycle. Simply stated, heading into the iPhone 6 launch, the average age of Apple's installed base of iPhones had grown quite old. For instance, in critical markets such as the U.S. and China, at least half of Apple's iPhone installed base were using either the iPhone 4 or 4S.
Considering the massive number of old iPhones and the tremendous brand loyalty Apple enjoys, many expect consumers around the world to upgrade their old iPhones throughout this fiscal year, an assumption that seems eminently reasonable.
3) Increased uncertainly kept Google down
Meanwhile, Google is limping toward the end of what has been a moderately painful year. While sales growth has remained strong, profit growth has continued to decelerate, leading to increased skepticism that Google will ever monetize its exploding number of mobile search ads as effectively as it does its desktop ads. Mix in the increased regulatory pressure Google faces in Europe and elsewhere, and the past 12 months crystallize into the kind of year that drags on a company's stock price.
Which is the better buy for 2015?
The honest answer is that I'm not sure. To me, Apple's financial road map is clearly more easily discernible and positive. The downside is that at least some of that justified optimism is already baked into its stock price. On the other hand, Google faces far more uncertainty, but that added risk might also present an attractive entry point for long-term investors willing to wait for the company's headwinds to dissipate. As always, the path ahead is far from clear for investors. However, the year ahead will unquestionably once again bring plenty of change for both companies.