Apple (AAPL) reported earnings last week and the stock suffered a significant sell-off afterwards.
On the other hand, Facebook (FB) also reported earnings last week and the stock advanced significantly.
Facebook obviously reported earnings that exceeded analyst’s estimates, while Apple’s report disappointed the street.
But the difference between the two stocks runs much, much deeper than just their latest earnings report.
One company is in its prime, while the other one is well past it. Let’s take a closer look.
As a professional money manager, I took a lot of calls from clients and prospects back in 2012 as Facebook was getting ready to go public. It was one of the most anticipated IPO’s of all time.
My advice back then was to give Facebook one year as a publically traded company and then consider buying it. Looking back, that was pretty good advice.
Facebook’s IPO was a big flop. It hit $45 on opening day, and then eventually traded all the way down to $17 per share. There were a lot of disappointed and angry shareholders. It was even called “Faceplant” for a while. The stock stumbled very badly out of the gate.
Facebook did earn $0.50 per share in earnings that first year, however. That was a good start. It can take many years for a lot of brand new publically traded companies to turn a profit-some never do. It was now time to see how Facebook could build on that initial year of earnings.
Believe it or not, Facebook has grown their earnings at an average clip of 51% per year since then. Earnings growth and stock price appreciation almost always go hand in hand.
Facebook has not been a publically traded company for five years yet, but the shares do have a three year track by now. The three-year average return has been 63.2% per year. That return is very close to its earnings growth rate.
By comparison, the S&P 500 has delivered an average annual return of 9.5% over the last three years. There is quite a bit of alpha in those Facebook shares!
Over the last twelve months the shares of Facebook are up 44.7%, while the S&P 500 is down 1.8%. Facebook’s cup of alpha runneth over!
Now just for fun, let’s take a look at Apple’s earnings growth over the last five years. While Facebook has been averaging 51% in average annual earnings growth, Apple has been running at a much more tepid growth number of just 19% per year.
All things being equal, slower earnings growth leads to lower capital appreciation. As you can see from the graphic below, Apples shares have averaged 15.6% per year in capital appreciation over the last five years.
Data from Best Stocks Now App
Over the last three years, the shares of Apple have delivered an average annual total return of 19.2% per year. What was Facebook’s average returns again? Oh yeah-63.2%!
As you can also see from the graph above, Apple shares are down a whopping 26% over the last twelve months. During that same period of time, Facebook’s shares are up 44.7%. That is quite a performance gap between the two stocks!
Is the stock of Facebook really that much better than the stock of Apple? In my opinion, the answer is a resounding yes!
We have now compared the performance of the two stocks. The performance of Facebook has run circles around the performance of Apple.
We have already discussed the earnings growth of the two companies. Facebook has been growing it earnings by 51% per year over the last five years, while Apple has grown by just 19% per year.
But wait, it gets even worse than that! Look at the most recent quarter of the two companies: Facebook reported sales that were 52% greater than the same comparable quarter from last year.
By contrast, Apple reported sales that were 13% lower than the same quarter last year. That is plus 52 vs. minus 13! It appears that Apple’s sales have peaked for now, and are now in decline. It is also obvious that Facebook’s growth is in full stride.
But it still gets even worse for Apple. Earnings from their most recent quarter were 18% lower than last year, while Facebook’s earnings were up 83%! Facebooks earnings are still accelerating, while Apple earnings are now in reverse.
But what about value? How can you pass on a prime technology stock like Apple trading at just 11X earnings?
I saw a money manager on one of the financial channels just drooling over Apple’s low PE ratio. That was before they reported their earning last week. He must be backing up his truck by now.
I do not own a truck, and if I did I would not be loading it up with shares of Apple.
The stock is trading at a low multiple for a reason. Growth is slowing down faster than you can say “Apple watch.”
But are Apple’s shares really that cheap? Apple’s shares are currently trading at a premium to its anticipated 5 year growth rate.
That’s right. As you can see from the graphic below, the PEG ratio of the shares is currently 1.12.
Data from Best Stocks Now App
The stock still has decent upside potential over the next five years, but I am not real confident in the current consensus five-year average growth rate of 9.2%. I think that a five-year valuation of about $150 is more like it.
I have a proprietary ranking and grading system that takes into account performance, valuation, quality, and technical patterns. When I weigh all of those factors, Apple currently gets a very dull grade of C+ overall, and it is ranked at 2,814 out the 4,118 stocks, mutual funds, and ETF’s in my database.
I have not owned Apple for about one year and I have no interest in it currently.
Believe it or not Facebook on the other hand, despite its recent monster move, is still trading at a DISCOUNT to its GROWTH RATE.
That’s right, check it out…
Facebook is currently trading at 28X next year’s earnings estimates. This compares to an anticipated five-year growth rate of 33.7% per year. This give Facebook a PEG ratio of 0.83. Facebook is trading at a discount to its growth rate, while Apple is trading at a premium to its growth rate.
I have a five-year target price of $215 on the shares of Facebook.
When I combine the performance, value, quality, and technical pattern of Facebook I get a proprietary grade of B+ and an overall ranking of 126.
Facebook continues to be good-sized position at Gunderson Capital Management.
It looks to me like Facebook is the new Apple.