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Apple (NASDAQ: AAPL) is still the world’s largest publicly traded company. It is also one of the world’s most profitable.
Earnings and profitability are big positives in today’s market. Many of the world’s greatest thinkers, including David Tepper, Jim Rogers and David Einhorn have all questioned the valuations of the stock market. All suggesting it might be a bit “frothy.”
In his letter to investors last quarter, Einhorn said that we should be valuing companies based on earnings, and not sales or addressable market.
Luckily, Apple is very profitable, and so are a few other tech giants. But has Apple’s growth story run its course?
Shares of Apple have been on a tear over the last decade. Apple’s stock is up 2,100% over the last ten years, while the NASDAQ index is up a mere 100%.
As a result, investors should be asking; what is the next great growth story of the tech industry? One place to start is with companies that are more profitable than the largest publicly traded company in the world.
Apple’s net profit margin over the trailing twelve months is 21.4%, and its operating margin is 28.6%. Think about it this way; for every $100 in sales, Apple keeps $21.40 after paying all expenses and taxes. Believe it or not, three tech companies are more profitable than that.
Three Tech Stocks More Profitable Than Apple:
1. Oracle (NASDAQ: ORCL)
Oracle has the highest margins of all the stocks listed. Its net margin is a robust 29.3%, and operating margin is at 38.9%. Oracle enjoys superior margins because of its software-focused business model. It does not sell hardware like Apple. It is one of the leaders in enterprise and database management software.
Thus, Oracle will be one of the biggest benefactors of higher spending on cloud software and software-as-a-service. That’s because Oracle has been making a serious push into the cloud and software-as-a-service market over the past few years.
In 2012, it bought up RightNow and Telo, spending $3.4 billion collectively. It added Eloqua in 2013 for just under $1 billion. Earlier this year it snatched up Responsys for $1.6 billion.
The majority of its revenue contributions from these acquisitions are subscriptions. That means the revenues are recurring, which will make Oracle’s cash flows easier to predict. Its current dividend yield is 1.2%, which is only a 15% payout of earnings. With increased visibility of its cash flows, Oracle might look to boost its dividend.
2. Microsoft (NASDAQ: MSFT)
Microsoft has a net margin that is 26.9%, while its operating margin is 32.8%. Microsoft’s key product is its operating systems, which runs on the majority of PCs worldwide.
Right now, most of Microsoft’s hardware business is PC-focused. But Microsoft has turned its focus toward higher margin cloud services. New CEO, Satya Nadella, was formerly the Vice President of Microsoft’s Cloud and Enterprise segment. Nadella’s motto is, “mobile first, cloud first.” The company’s first step toward this was the launch of Office for iPad.
The next step is to grow its presence in the mobile market, hence its purchase of Nokia’s devices and services business. This deal will also give Microsoft a greater presence in emerging markets.
Microsoft is the best dividend story of all the stocks listed. It pays the highest dividend yield of the four, coming in at 2.8%. It has increased its annual dividend payment every year for the last decade.
3. Qualcomm (NASDAQ: QCOM)
This semiconductor company has a net margin of 26.9% and operating margin of 29.3%. Qualcomm manufactures digital wireless telecom products. The barriers to entry are high for the semiconductor industry, thanks to the intellectual property and economies of scale that is required.
Unlike Apple, which relies heavily on sales of iPhones, Qualcomm has exposure to the entire smartphone industry. Qualcomm is the major chipset provider to both Apple and Samsung. Together, Apple and Samsung, own 40% of the smartphone market share.
The other angle for Qualcomm is growth from faster growing markets, such as China. China Mobile, the largest mobile operator in the world by subscriber count, has plans to roll out more than 500,000 LTE base stations by the end of 2014. Meanwhile, other emerging markets are accelerating their shift from 2G to 3G technology.
One of the most appealing aspects of Qualcomm is that it has no debt and pays a 2.1% dividend yield. Its dividend is only a 33% payout of earnings, meaning that the tech company has plenty of cushion to up its dividend in the future.
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While these three tech companies are more profitable than Apple, are they a better investment?
Apple trades at a P/E of 12.6 based on next year’s earnings estimates. All three of the other tech stocks trade at a P/E that is just under 14. However, shares of all three have outperformed Apple’s stock by 100% or more over the last two years.
The three tech stocks that are more profitable than Apple have various growth avenues, whereas Apple is still heavily reliant on iPhone sales. Investors looking for the next Apple will likely find themselves disappointed time-and-time again. However, investing in companies that are more profitable than Apple appears to be a great strategy for generating market-beating returns.
The One Company You’ve Never Heard of – But Smartphones Couldn’t Exist Without
Four months from now Apple will be releasing the most technologically advanced phone on the planet. And cautious estimates have them selling 200 million of them. While we love Apple (it’s in our 100k portfolio) we’re recommending a much less known company today… a company no one is talking about. A company that provides the technology, without which, smartphones couldn’t exist. It’s the company reaping massive profits each time a new Apple (or Samsung) smartphone is activated. In fact, as mobile data usage explodes in the year ahead, its stock is set to soar! Shares are already on the move. So, before this stock moves any higher, read our latest report for all the details: Click here for the full story.