Google vs. Apple: Apple

In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!

Allow me to tip off this debate by admitting the obvious: Neither Apple (NASDAQ:AAPL) nor Google (NASDAQ:GOOG) is cheap by the numbers. Accordingly, this debate can't be purely about valuation.

But it can be about whether the premium you'll pay for these stocks is in any way defensible. To do so, we'll need to dig into the competitive advantages of each. Ready? Ball in.

Plenty to admire
Let's begin with Apple. The Mac maker is soaring, thanks to a series of strategic moves that have widened its moat. One of those moves, its retail-store initiative, was highlighted by Fortune in naming Apple No. 7 on its latest list of the "Most Admired" firms.

There's a good reason: On a per-square-foot basis, Apple outsells the world's best brands, including renowned jeweler Tiffany & Co. (NYSE:TIF). These locations are so appealing that Barron's once suggested that ailing rivalDell (NASDAQ:DELL) should enter the retail game. To his credit, Rick Munarriz, my opponent in this contest, warned Dell to back away. So far, it has.

But that's because of Apple's unique status. Rick puts it best: "Apple works as a retail concept because it stocks unique items that folks want. If you need a Windows-powered laptop or an MP3 player, you don't need Dell. Unless it has a hit that's based on proprietary technology, what's the point in embarrassing itself?"

There isn't one, Rick, and there won't be one for a while. Look what's coming. First, there's the new Leopard OS, due this spring, which could make Microsoft's new Vista OS look like the digital equivalent of a lawnmower engine. Then there's the iPhone, due in June, which looks promising and, despite complaints to the contrary, is priced properly.

Not much to admire
Google, though also one of Fortune's "Most Admired," is in a tougher spot. Why? Despite years of use, search technology remains a relatively new innovation that demands improvement. I know this because millions of people are working on making it better, including some of Google's own researchers.

But there are hundreds, if not thousands, of others. Venture capitalists, for example, are pouring billions into new search technology. Scientific papers studying search are so common that Microsoft (NASDAQ:MSFT) submitted one last year.

Then there's advertising. More than 98% of Google's revenue is derived from digital pitches. That wouldn't be a problem except for click fraud, which allows competitors -- or anyone, frankly -- to click multiple times on ads displayed through Google, bogusly boosting the cost of advertising and thereby corrupting the results.

For its part, Google says that while 10% of all clicks are bogus, only 0.02% pass through its filters. I hope they're right, but not all investors are buying it. Check out the consensus view of Google offered by the amateur and professional investors participating in Motley Fool CAPS:

The numbers get worse when you poll the top stock-pickers. Of the 705 All-Stars who have rated Google -- those players whose picks have outperformed more than 80% of the CAPS community -- only 56.7% say the stock will outperform. Surely click fraud is a factor in their thinking.

Whether they're right remains to be seen. Till then, it's certain that search will improve to the point where you can ask a direct question, and get a direct answer automatically. Indeed, this desire is so fervent that a Baby Breaker company called ChaCha recently received $6 million in funding for a human-driven service that delivers far more precisely than Google ever could.

That brings me to the reason Apple deserves your vote. Much as I love Google -- and I do -- there's no reason to believe it can sustain its lead in search. Apple, on the other hand, has built what seems to be an insurmountable lead in digital entertainment as it eats away at the market share of its PC rivals. That's great defense, and, as on the hardwood, it should be enough to earn a win here.

Do you agree? If so, head to Motley Fool CAPS and vote Apple to "outperform." Later this week, our editors will tally your votes to determine which stocks will advance one step closer to the title.

Read our opposing article on Google, or see all the entries in the tournament.

Think you could pitch your favorite stock -- or ditch your least favorite -- in 27 seconds or less? That's what we're doing over at Motley Fool CAPS. Check out our new Apple stock video.

Fool contributor Tim Beyers, who is ranked 1,507 out of more than 24,200 in our Motley Fool CAPS investor-intelligence database, wrote this article on his MacBook Pro, but didn't own shares in any of the stocks mentioned in this article at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on Foolishness and investing may be found in his blog. Dell is a Stock Advisorpick. Along with Microsoft, it's also an Inside Value recommendation. The Motley Fool's disclosure policy is irresistibly shiny.