Apple and Google reported earnings last week and each stock responded very positively.  This was an interesting outcome given that Apple’s results were well ahead of expectations, while Google fell a little short of Wall street estimates.  Media Tlak has often noted how expectations and sentiment drive a stock’s immediate reaction to earnings.  Read on to get Northlake’s latest views on Apple and Google and gain a better understanding of the latest results and stock price action.

Apple reported a strong quarter, driven mainly by iPhone sales that were well above elevated expectations. More importantly, guidance for next quarter was at least as good as Wall Street expectations even though the iWatch will not ship until the following quarter. The combination of strong earnings and in-line guidance suggests that the powerful iPhone 6/6+ upgrade cycle may extend longer than originally anticipated. Additionally, Apple announced that many iPhone sales were made to customers who either switched from Android or were new to Apple. This implies continuing strength in the upgrade cycle when Apple releases the “S” versions of the iPhone 6/6+. These strong operating results give us confidence in our updated price target of $130 for AAPL.

Apple’s other segments also continue to look promising. Mac sales were strong again, offsetting recent weakness in iPad sales. It appears that iPad results may be stabilizing some as well. Early adoption of Apple Pay looks promising as well. In conjunction with digital sales from the App Store and iTunes, Apple looks to be building another highly profitable revenue streams in addition to the iPhone.

Google’s fourth quarter 2014 earnings saw financial and operating metrics below Wall Street estimates but better than the negative fears held by many following poor performance of Google stock over the last several months. Financial metrics were better than they first appeared, as the company identified material one-time expenses that were the primary cause of earnings coming in below expectations. Within operating metrics, there were some silver linings. On Google’s own sites, the volume of search was stable at high growth, while pricing continued its very slow improvement.

The valuation on the stock still appears low with upside to our target of $650. However, Google needs to report a clean quarter in-line with or ahead of expectations to meaningfully improve investor sentiment. Also, it would be very beneficial to the stock price if the company decided to return some of the excess cash balance of $86/share to shareholders through a dividend or share repurchase program, much as Apple did when investor sentiment was poor and management conviction in the health and growth profile of the company was strong.

AAPL, GOOG, and GOOGL are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  AAPL, GOOG, and GOOGL  are net long positions in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.