Apple, Microsoft, or Google: Which Is the Best Buy?

Three massive names rule today's technology sector. From iMacs to iPads, Apple's (Nasdaq: AAPL  ) iEmpire seems to roll out one hot product after another. Mighty Microsoft (Nasdaq: MSFT  ) still owns desktop computing and has begun aggressive initiatives to conquer the cloud and master mobile devices. Omnipresent Google (Nasdaq: GOOG  ) rules Internet search and advertising, and guns for both Apple and Microsoft with its online apps and Android mobile OS. But which of these giants will earn investors the best return by the middle of the decade?

On The Motley Fool's Twitter feed, Foolish follower @ParitoshMohan recently asked: "Which out of GOOG, AAPL, MSFT is the best growth investment from a 2-3 year perspective?" We put that question to three of our best investing minds, and asked for their takes on which tech luminary will shine brightest in the years ahead.

An embarrassment of riches
Anders Bylund, Fool contributor.
For me, it's hard to beat the combination of business growth and stock value that Google delivers. Among this trio of tech titans, Google stands alone:

  • Apple is certainly a growth stock, but too risky for my taste. This stock is fine as long as absolutely everything goes according to the grand plan of Steve Jobs, but Murphy's law will surely intervene at some point.
  • Microsoft's stock is cheap, but this is a dinosaur searching for direction, and failing more than it succeeds. Here, you're looking for a turnaround of epic proportions -- one that may never happen under current management.

And then there was Google. The undisputed search leader is quickly becoming a mobile leader, too. It's only just getting its feet wet in offline ventures like TV advertising and clean energy. And we often don't even know what Big G's next big thing is until it hits us over the head.

Google's growth story is not finished, but the market treats the stock like a fully mature no-growth paper. Act accordingly.

Meet the true king of all media
Tim Beyers, Fool contributor and Motley Fool Rule Breakers analyst.

When this question first came, I was poised to pick Google. Why? The search king is undervalued, and is spreading its software to all corners of the world, thanks to the success of its Android mobile operating system, which recently has been outselling Apple's iOS device platform.

But I just can't do it. As much as I believe Google will come to dominate computing over the next 20 years, I think Apple is the better buy over the next two to three years, thanks largely to a shift in content distribution models.

The iPad has changed everything. It's the one device capable of aggregating media from many different sources. From streaming movies to newspapers to e-books, virtually every content distributor is seeking space on iOS devices. This, Fool, is one of the reasons why the iPhone and iPad already account for $30 billion in annual sales, or close to half the $65.2 billion in revenue Apple booked in fiscal 2010.

Clearly, we were all too conservative in estimating the effect of the iPad and Apple's other iOS devices. I won't make that same mistake twice. Neither should you.

Why Joe goes with Goo
Joe Magyer, lead analyst, Motley Fool Inside Value
Poor ol' Microsoft can't get no respect. Sure, it'll probably never make a serious dent in mobile, and its core Windows and Office franchises have futures with all the excitement of power lines. The shares are awfully cheap, though, swapping hands at only 11 times earnings. Plus, you've got to give Microsoft and its 2.4%-yielding dividend some credit compared to cash hoarders Google and Apple.

But that Microsoft apologist pitch aside, Google is my horse in this race, thanks to the underrated durability of its search franchise, the success of Android in the fast-growing mobile market, a host of other irons in the fire, and its $31 billion in cash. Little wonder I tabbed it as a buy a few months back at Inside Value.

You ask, we'll answer!
Thanks to @ParitoshMohan, and to all our Foolish followers on Twitter. If you've got a burning question about money or stocks, we'd like to help! Tweet us @TheMotleyFool or leave a comment below; the best questions could become the subject of future Fool articles.

Eager for more great tech stock ideas? Come back to Fool.com at 11 a.m. ET tomorrow, when we'll unveil our picks for the Top 5 Tech Stocks for 2011.

Apple is a Motley Fool Stock Advisor pick. Microsoft is a Motley Fool Inside Value selection, and Motley Fool Options has recommended a diagonal call on the company. Google got the nod from Motley Fool Rule Breakers. The Fool owns shares of Microsoft and Google. Try any of our Foolish newsletters free for 30 days.

Fool online editor and lead tweeter Nathan Alderman is biased heavily toward Cupertino, but only because he's easily distracted by shiny objects. Tim Beyers owns shares of Apple and Google, but neither Nathan nor any of the other contributors above hold any financial position in the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy pines for the days of the Commodore 64.


Read/Post Comments (8) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 13, 2010, at 5:24 PM, misskimberly1 wrote:

    Although Microsoft is trying to pull itself back up to relevancy in the Mobile field i just dont see them as worth investing in any more. They are far gone from a growth company.

    I still think Apple is a good investment. At least for another year.

    Kimberly

    http://canadianprofiteer.com

  • Report this Comment On December 13, 2010, at 10:23 PM, baldheadeddork wrote:

    Dork's Take -

    AAPL: I wrote in another piece about Apple that past dominance does not guarantee future performance. Their entire run over the last decade is directly related to selling digital media and coming up with new devices to use it with. They've mostly owned the market, but I think that period is quickly coming to a close. Android has already overtaken them in the smartphone market, Android tablets are coming, and there are a lot of places to buy digital media today.

    If you want to believe that Apple is going to continue its dominance, you either have to believe that none of this competition will hurt Apple's growth.

    Or you have to believe that Apple is about to invent some new miracle device that will rule this decade like the iPod and its descendents did for the last ten years. The ugly truth is, between the iPhone and the iPad their track record on new products has been a mess. Apple TV was a bomb in both generations, Mac Mini went nowhere, and the MacBook Air was quickly overrun by $300 netbooks.

    I don't think AAPL is going to collapse, but I think they're set up perfectly for a long period of stagnation.

    GOOG - Their dominance in search and advertising is a hell of a moat, but they're vulnerable from a couple of points. Their attempts to branch out from advertising have driven a lot of traffic to Google ad sources, but they haven't had a lot of success in creating new sources of revenue. Google does a lot of cool things, and recently some not-cool stuff, but the ads make all the money.

    On ads, I'm a little concerned about their exposure to some changes in the ad market that might be coming soon. The #1 way for viruses to infect a computer today is through ads. This isn't Google's fault, but Firefox with its Ad Block Plus looks really good after someone has paid $100 or more to have their computer fixed, and that will take money out of Google's pocket.

    MSFT - The conventional wisdom of Microsoft is, as Anders put it, "a dinosaur searching for direction."

    In reality, this is a company that's had a string of really big hits in recent years. Windows 7 sold almost 250 million copies in its first year. That's five times as many iPhones sold by Apple - ever. Windows Phone 7 is getting rave reviews, Microsoft's Sync is the world's best in-car OS, and Kinect is the hottest product in video gaming since the Wii. And Microsoft still dominates the office software and business software markets.

    (If anyone wants to talk about MSFT's shortcomings in cloud computing, please begin by briefly showing you know what it is. Cloud is an opportunity for MSFT - and everyone else - but it doesn't threaten their existing business. Love - Mr. Dork, Systems Admin and Network Engineer.)

    Looking forward, Microsoft is going to benefit more from a return in business spending than Apple or Google combined. Kinect is going to give MSFT an edge in gaming for at least the next year and possibly longer, and Windows Phone 7 is poised to take a boatload of market share from Blackberry.

    If the shares were priced equally, this might be a horse race. But they're not. MSFT trades at half the earnings valuation as Google or Apple, and MSFT pays a dividend. Which is the best buy? Are you kidding?

    I can't guarantee that Microsoft will go on a tear like Apple and Google has in the last decade. But the company is doing a lot of right things and the shares are dirt cheap. Maybe the "dinosaur" conventional wisdom on MSFT holds for another decade, but it's going to take a lot of willful ignorance.

  • Report this Comment On December 13, 2010, at 11:05 PM, ChuckWoolery wrote:

    @ baldheadeddork:

    Nice piece on the three companies. I own share in all tech giants but I agree with every point you made here about Apple and Google.

    I am not sure about how successful the Windows 7 mobile OS and cloud computing but Microsoft, like Google and Apple, has boatloads of cash. My concern is, and has been since I bought these stocks earlier this year, is do they know how to spend it wisely? If not, pay a bigger dividend.

    I like each company for each reason you listed:

    Goog = ad revenues, growing stock, diversified in ads and OS for computers/phones

    AAPL = create high demand for their products, encompass an entire ecosystem form the hardware to the software

    Microsoft = moving towards cloud computing, Kinect and persistance in dominating business software/ OS software

    I really hope Microsoft finds a way to drive ahead and acquire/innovate new streams of revenue.

  • Report this Comment On December 14, 2010, at 6:56 AM, berentp wrote:

    Google and Apple are already market superstars, whose prices have gone up massively. There is another stock that will make loads of money from all the new smartphones and the verizon iphone being released in January. This stock is American Towers (AMT), which builds cellular towers around the world, but their main business being in the US. These towers are leased out to the cellphone service providers so they can place antennas on them. Cellphone service providers need them to supply service, and with 4G and all these new smartphones more and more service is needed. That means a lot of new business for AMT, and their stock could boom. I wrote a whole article about AMT on my blog and am reccomending it as a buy. Feel free to read my article by clicking this link:

  • Report this Comment On December 14, 2010, at 12:03 PM, khaledmrd wrote:

    Microsoft Still Dominate the Enterprise and people will still buy Windows and Office

    It is how Microsoft come back in 2011 in the consumer and Mobile Space?

  • Report this Comment On December 16, 2010, at 10:10 AM, rolaMia wrote:

    might I ask, as someone new to trading, why Microsofts stock is so far behind Goog and Apple? And does anyone see it ever getting close to those two?

  • Report this Comment On December 16, 2010, at 9:20 PM, baldheadeddork wrote:

    @rolaMia:

    That's a really good question, and in the answer a lesson that a beginning investor would do very well to learn.

    I'll start with a really obvious answer, and I apologize in advance if you already knew this. If you're asking if MSFT is ever going to trade for $320 a share like APPL, the answer is probably not. One reason why Apple and Google trade at such a high price per share is that they have a much smaller number of outstanding shares than Microsoft. Google's earnings per share are ten times greater than Microsoft's, but Microsoft made three times as much money.

    So the first thing in comparing these three is to look at benchmarks that measure companies equally regardless of outstanding shares. One of the most popular is Price to Earnings (P/E), which is the share price divided by the most recent earnings per share. If you look at the EPS for these three, you see that the share price for Microsoft would have to double - not increase ten fold - to have the same valuation as Google or Apple. Can Microsoft close that gap over the next few years? It's not likely in the immediate future but it's not out of the question, either.

    But how did Microsoft get to the point where it's valuation (P/E) is so small compared to Apple and Google? Microsoft has a more diverse product line up, they are dominant in huge sections of the IT industry, and successful software companies are always going to be more profitable than other industries because the manufacturing costs are so low. If you look at it rationally, you can make a case that Microsoft is the company that should be trading for twice the P/E of Google and Apple.

    And that's the first lesson: Forget what you may have read or studied in school, the market is not rational. It might be if investors only looked at the financial numbers of a company, but no one in their right mind ever buys or sells based on financial performance alone. You want to know something about what the company makes, what the market for their products is like, and so on.

    Every one of those points is a opening for bias - for making decisions on what you think instead of what you know. Your bias can be dangerous, but unless you're Warren Buffet it's not going to move the market. However, the market as a whole can form bias opinions about well-known companies, and this "conventional wisdom" definitely affects share price.

    That's why Microsoft has a P/E half Google or Apple's. Despite all of its advantages and performance on paper, the collective wisdom of the market says MSFT is an old company, out of touch with its customers and the future trends in IT. The conventional wisdom also says that Apple is hip, cutting-edge, and the most innovative company in the world.

    Once these memes take root, they have a lot of momentum and they defy news that is contrary to what people want to believe. To listen to analysts covering Microsoft and Apple, you wouldn't know that the former is on a real hot streak with new product and the latter is racking up a lot of strike outs in between its two home run products.

    It can make life very frustrating for a Microsoft investor, and it gives a false sense of security to someone who owns APPL.

    The conventional wisdom can change, and when it does you can make a lot of money if you saw it coming early, like buying Ford when it was under $5 a share in the winter of 2009.

    But if it doesn't change, the difference between a gamble and an investment is what happens to the stock then? Ford was more of a gamble because there was a possibility it could go into bankruptcy. Microsoft is a lot different. It's valuation is a bargain against even companies with similar financial performance. If it catches up to them, you're still going to pocket a really nice gain.

    HTH - Dork

  • Report this Comment On December 30, 2010, at 12:22 PM, rolaMia wrote:

    @baldheadeddork I greatly appreciate your insight and willingness to share your knowledge with a new comer like myself. A truely great read and thank you again for your response!

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