Trading the spread between Google and Apple: How to make money on it? (Part 2)

В previous article We introduced you to the NetTradeX trading terminal for creating personal composite instruments using the GeWorko method. We used Google and Apple stocks as an example.

After doing a quick analysis of both companies, we hypothesized that Apple stock would be slower to appreciate and faster to decline compared to Google stock, at least until the annual earnings release. We then created a personal PCI GeWorko - Google/Apple composite tool. Since the basis of the express analysis was fundamental data, we decided to look at the changes.



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Changes in the fundamental data of Google and Apple

At the end of January, Google and Apple released their next corporate reports. The main trends noted in our previous review remained the same. Google's financial growth continues to outpace that of Apple with a comparable level of profitability of both companies.

Figure 1. Google's quarterly reporting figures.
Figure 1. Google's quarterly reporting figures.

The company reported data for Q4 2013 and for the full year 2013. We believe that the main positive factor for Google stock prices was a 40% increase in revenue for the year and a 38,66% increase in Q4. Earnings per share declined in Q4. As a consequence, there was a noticeable decrease in net profit margin. However, thanks to growth in previous quarters, net income per share for the year increased by 10.2% at a respectable 24.9% margin.
Let's note the changes in the forecast of economic indicators of the 1st quarter of 2014. Forecast 1 was presented by Reuters in late December last year, and Forecast 2 - in early February this year. Despite the obvious decline in revenue growth, its revision was made upward. The reduction in the net income per share forecast slightly reduced the profit margin to a perfectly acceptable 25.4%.

Figure 2. Apple's quarterly reporting figures.
Figure 2. Apple's quarterly reporting figures.

Apple has reported for the 1st quarter of the new fiscal year. As we noted earlier, the company's fiscal year-end is September 30th. Accordingly, it is calling the 4th quarter of the calendar year the 1st quarter of the new year.
Revenue and earnings per share slightly exceeded analysts' forecasts. It's did not cause a surge in stock pricesas at the same time the Reuters forecast for Q2 2014 was noticeably lowered. Forecast 2 in the table looks noticeably worse than Forecast 1. Apple's expected revenue decreased by 4.3% and earnings per share by 5.2%.

Composite tool analysis

Comparing the quarterly data and forecasts of Google and Apple, we assume that the development of Google will go faster. Let's take a look at some indicators of both companies' reporting for the year.

Google has a much larger credit load than Apple. Because of that, it has the same return on net operating cash flow with a lower operating margin. Apple's P/E ratio is much lower, but we have so far we don't think that makes her stock more attractive. The current ratio (P/E of Google)/(P/E of Apple) or according to the table 31.7/12.7 is 2.5. Given the quarterly earnings per share forecasts for both companies, extrapolated to the end of the year, the forecast ratio can be lowered to 2.1. In our opinion, it has not increased that much as compared to the beginning of January (1.8), when the previous review was written.

Fig. 3. Comparative table of indicators.
Fig. 3. Comparative table of indicators.

The Google/Apple PCI since it was first posted on our website on January 7, 2014 at a P/E ratio of 1.8 managed to be up nearly 15% by January 31. We believe that with a projected (P/E Google)/(P/E Apple) ratio of 2.1 it also has the potential to grow and is in an uptrend. That is, the opportunities for arbitration remain.

Investors expectthat Google's net income will grow rapidly, which will eventually lead to a lower P/E for current stock buyers. In turn, Apple's performance could stagnate.

Fig. 4. Daily chart of the instrument &Google/Apple.
Fig. 4. Daily chart of the instrument &Google/Apple.

Based on the second express analysis, we believe that upward trend PCI composite tool GeWorko - Google/Apple may continue, at least until the next quarterly report is released. Google will present it on April 14, Apple on April 21. 

Trading the spread between Google and Apple: How to make money on it? (Part 1)

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