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October 22nd, 2014 at 2:49 pm

Why Google could beat Apple and become the first $1 trillion company

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Google could beat Apple to the milestone.

Colin Gillis, a technology analyst at BGC Partners predicts Google Inc. will be the first $1 trillion company by market capitalization, not current front-runner Apple Inc.

 

 

Gillis said Google’s market value will exceed $1 trillion in 2020. As of Friday’s close, Google sported a market cap of about $375 billion, meaning its share price (recently at $554.20) would have to jump to nearly $1,500 for the market cap to surpass $1 trillion.

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“Google is positioned to be the first company on a U.S. listed stock exchange to have a market capitalization exceed one trillion dollars, an event that could happen by the next decade,” Mr. Gillis wrote to clients last week. He has a buy rating and $650 price target on Google. “The company is taking the cash flows from its performance marketing business (the best in the world in our view) and chasing after large markets such as content, operating systems, enterprise computing, robotics and automation.”

To pull off the feat, Google first has to eclipse Apple. That’s no easy task, as Apple’s profit, revenue and market cap tower over Google’s. Google also trades at a more expensive price-to-earnings ratio than Apple at the moment.

In its fiscal 2013 which ended last September, Apple reported full-year profit of $37 billion and sales of $170.9 billion. In 2013, Google reported net income of $12.9 billion on revenue of $55.5 billion. Apple’s market cap, at about $600 billion, is more than $200 billion higher than Google’s.

Google’s Class A shares recently fell 0.2% at $554.07.

Apple shares were little changed at $100.73.

Google trades at 21 times next year’s earnings estimates, according to FactSet, whereas Apple trades at a forward price-to-earnings ratio of about 16.

The race to $1 trillion will undoubtedly face obstacles. “The path between now and 2020 is filled with unknown risks,” Mr. Gillis acknowledged. And for all the work that Google has put into Android, Chrome and other business units, it still generates a vast majority of its profits solely from search.

But Mr. Gillis is optimistic that many of the opportunities Google is pursuing now could prosper in the years ahead.

“We may see the Robotic effort may monetize at an accelerated pace given the pace of acquisitions (over 10 acquired companies targeted to the effort in our opinion),” he said. “We also expect that the click pricing declines seen since 2011 should reverse in the relatively near future (fall of 2015?) as mobile monetization improves and location based marketing gains traction.”

The debate around valuation comes after billionaire investor Carl Icahn last week pushed Apple to buy back more stock. He argued that the company’s shares are trading at half their value because the broader market “misunderstands and dramatically undervalues” the iPhone and iPad maker.

Mr. Icahn said Apple’s stock should trade at $203, which would give Apple a $1.2 trillion market cap.

In August, Google celebrated its 10-year anniversary trading on the public markets. The stock rose 1,294% over the past decade following its trading debut. However that pales in comparison to Apple’s performance. Over the same time frame, the iPhone maker’s shares surged 4,419%.

That trend has started to change in recent years; Since the beginning of 2013, Google has rallied 57%, while Apple has gained 32%.

“The next five years may prove favorable to Google as the company has a management team willing to invest heavily, a talented employee base, and a balance sheet that is able to support the needs of the business,” Mr. Gillis said.

Photo credit: Investopedia

Via Wall Street Journal

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