Welcome to "Stock Smackdown," where two of your favorite stocks go head-to-head in a battle for superiority. They'll each be judged on a series of objective merits, including valuation, earnings quality, price appreciation, and dividend quality. We'll also take a look ahead at some more subjective measures. Wall Street's analysts will get their say, but so will The Motley Fool's top market minds.
The winner will be the stock that racks up the most points at the end of their competition. Let's go ringside and meet our two combatants, Microsoft (Nasdaq: MSFT ) and Google (Nasdaq: GOOG ) .
In this corner …
This is a battle of Apple's (Nasdaq: AAPL ) top two rivals.
Microsoft remains the operating system of choice for computers around the world, controlling about 85% of the global operating system market. Windows (and Office) are successfully transitioning to a cloud-based world, and Microsoft's also pushing hard into the mobile space after missing out so far. It's also well established in the living room with its Xbox 360 console. Microsoft is everywhere.
Google has quickly become the Microsoft of the online world. It controls two-thirds of the search-engine market, and nearly 60% of the global smartphone operating system market. The company's also moving into next-gen hardware, and not only because it bought Motorola Mobility last year. Google's Project Glass is one of the most exciting pieces of consumer technology since the iPhone and could be a more transformative device in the long run.
Valuation battle
We use many different numbers and ratios when talking about the value of a stock. The price-to-earnings ratio is the standard, so we'll check each company's current P/E and five-year historical average P/E. We'll also use price to free cash flow today. Earnings can be gamed with a number of different accounting tricks, but free cash flow is harder to manipulate, making it a favored metric here at the Fool.
In each case, the difference between a stock's current ratio and its five-year average ratio will be more important than the numbers themselves. Stocks trading significantly lower than their average ratios may have more room to return to that middle ground.
For the tiebreaker, we'll check one less-used financial metric: the debt-to-equity ratio. A company with little or no debt is usually in better shape than one leveraged to its eyeballs.
|
Metric
|
Microsoft
|
Google
|
| P/E |
10.3 |
17.1 |
| 5-year average P/E |
13.5 |
22.8 |
| P/FCF |
11.6 |
25.1 |
| 5-year average P/FCF |
12.8 |
33.2 |
| Debt/equity |
0.17 |
0.05 |
Sources: Wolfram Alpha and Morningstar. Winners in bold.
It looks like Google takes this round at the last moment with a lower level of debt to equity. How will it fare in the next round? Let's find out.
Earnings quality battle
A company can be cheaply valued without being a good value. To balance out our valuation fight, let's look at a few key earnings statistics for each company. We'll look at gross and net margins, a five-year annualized rate of earnings growth, and consecutive years of both positive earnings and earnings growth since 1992, two decades ago. A company with no momentum today is less likely to become a superstar later -- it has happened before, but not often.
|
Metric
|
Microsoft
|
Google
|
| Gross margin |
76.6% |
64.9% |
| Net margin |
32% |
27.1% |
| 5-year annualized earnings growth |
10.7% |
20.8% |
| Consecutive profitable years (since 1992) |
20 |
10 |
| Consecutive years of earnings growth |
3 |
10 |
Sources: Morningstar and Wolfram Alpha. Winners in bold.
Microsoft takes the earnings quality crown, thanks to long history of profitability.
Dividend battle
A growing company is great, but one that pays you back at the same time is even better. Unfortunately for Google, Microsoft's the only company paying a consistent dividend. It takes this battle unopposed. Let's take a quick look at the quality of its payout before moving on.
|
Metric
|
Microsoft
|
| Dividend yield |
2.8% |
| Payout ratio |
26% |
| Free cash flow payout ratio |
22% |
| 5-year annualized dividend growth |
12.1% |
| Years of uninterrupted dividends |
10 |
Sources: Morningstar and Dividata.
Microsoft's dividend is very sustainable and might even be due for a boost. Can Mr. Softy seal the deal in the next round?
Battle for the investors
Looking at the past is well and good, but let's go further. How do the world's most engaged market participants view these companies? Let's see what Wall Street's analysts expect from these companies, and what our Motley Fool CAPS community thinks.
|
Metric
|
Microsoft
|
Google
|
| "Buy" recs (% of total ratings) |
70.3% |
93.5% |
| 5-year annualized forward growth |
8.8% |
17.6% |
| CAPS sentiment (% outperform) |
87.3% |
86.1% |
Sources: TheStreet, Yahoo! Finance, and Motley Fool CAPS. Winners in bold.
After four rounds, Google pulls back into a tie with Microsoft. The toughest (and most subjective) battle awaits: potential! What lies in store for each company in the months and years ahead?
Battle for the future
Microsoft's all about mobile lately. It may be making more off of Android than Google is, thanks to patent licensing deals it's signed with most Android device makers that sell in the United States. Piggybacking on Google's OS won't be enough to win the future, though. Microsoft has to get a mobile foothold with its own OS. Its partnership with Nokia (NYSE: NOK ) may wind up dragging both parties down, especially if Microsoft has to buy the Finnish mobile company to bail it out.
Microsoft's super-serious push into online search has left it playing an unprofitable second fiddle to Big G for years. The Xbox 360 is doing much better in living rooms than Apple's TV set-top box, but Apple TV rumors give Cupertino a decided advantage before it even begins. Microsoft keeps growing, but it seems slow to adapt to new challenges and has few potentially transformative products on the horizon.
Google, on the other hand, has one foot firmly in the future. Its ambitions for augmented-reality headwear are certainly ambitious, but that's not the only thing the company's top-secret labs have dreamed up in recent years. Try self-driving cars, robotics, and an Internet of things, all connected and feeding you the data you need to live more productively.
Google's biggest challenge isn't in making something of this wide-eyed ambition. It'll be staying focused enough on the right developments to properly shepherd it toward must-have consumer status. If Google gets it right, it could out-Apple Apple. If these big ideas don't become big products -- or, worse, become big products for another company -- Google may go down as the modern Xerox (NYSE: XRX ) , surviving on its one great breakthrough while better marketing teams make its brilliant ideas into moneymakers.
Both companies have a lot of irons in the fire, but only one company has something worth getting excited over. The new Surface is a nice progression in tablet design, but iteration isn't the same as innovation. I have to give Google the win in the fight for the future. With four victories to Microsoft's lone win, Big G looks like a clearly better long-term buy today.
Google isn't the only company that wants to change the world. Three small-cap innovators are advancing a technology so transformative that The Motley Fool's calling it "The New Industrial Revolution." Everything you want to know about these great stocks is in our free report -- get the information you need for another great buy today. Or to get the skinny on the pros and cons when it comes to Apple, the iEverything powerhouse, access the Fool's new premium research report.
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