One narrative driving the incredible rally in Bitcoin (CRYPTO:BTC) over the past year is that the cryptocurrency is "digital gold." In other words, it's a store of value that can protect investors against inflation.
Never mind that Bitcoin has no real track record of acting like a store of value. People have valued real gold for thousands of years; Bitcoin has only been around for a bit more than a decade.
Never mind that the cap on the number of Bitcoins that can ever be produced -- currently 21 million -- could conceivably be increased. That limit is governed by code, while the limit on real gold is governed by reality.
Never mind that there are many alternative cryptocurrencies, and that an endless number can be created. There are precious metals beyond gold, but not many, and there won't be any new ones.
Never mind that the price of Bitcoin is extremely volatile. Real stores of value generally don't plunge in a matter of hours.
And remember, real gold has been a pretty bad investment in the long run compared to stocks. That shouldn't be surprising – gold produces no cash flows and pays no dividends. Neither does Bitcoin.
Bitcoin as an investment just doesn't make much sense. That statement will sound pretty dumb as long as the price of Bitcoin keeps rising, but I think it will turn out to be true in the long run. Warren Buffett has called Bitcoin "rat poison squared." Sounds about right to me.
Instead of buying digital coins backed by nothing at all, consider investing in shares of dominant companies with durable competitive advantages and ample profits. Two prime examples are Microsoft (NASDAQ:MSFT) and Cisco Systems (NASDAQ:CSCO).
A software and cloud behemoth
It wasn't too long ago that Microsoft was viewed as a washed-up relic. Windows 8 was a disaster, the company's attempts to make Windows Phone a viable alternative to iOS and Android failed miserably, and cloud computing represented an existential threat to the company's core software business.
Microsoft got the message, and the results have been stunning. Windows 10 now runs on over 1 billion devices. Mobile strategy has shifted to putting first-class versions of Microsoft software on platforms that people actually use. Lastly, the company has embraced subscription cloud-based software and built out Azure, the No. 2 public cloud platform in the world.
The numbers speak for themselves. Revenue soared 17% in Microsoft's latest quarter, and earnings per share jumped 34%. Azure is growing at a 50% rate, and sales of the all-important Office suite increased thanks to the subscription-based Office 365.
Microsoft has managed to maintain its dominance in the productivity software market while challenging cloud market leader Amazon Web Services in the cloud computing market. While the pandemic may be boosting Microsoft's revenue, the growth story looks far from over.
Microsoft is not a cheap stock, trading for over 32 times the average analyst estimate for adjusted earnings per share in 2021. But in my mind, it's all but a guarantee that Microsoft stock outperforms Bitcoin in the long run.
The leader in networking hardware
Cisco stock hasn't performed as well as Microsoft stock in recent years, but the company is no less dominant. Cisco is the overwhelming leader in enterprise networking hardware, with a near-50% share of the Ethernet switch market and a 33% share of the enterprise and service provider router market, according to International Data Corporation.
This dominance has persisted over the years despite the rise of lower-cost competition. Cisco suffers from the occasional downturn in demand as its customers pull back on spending during times of economic uncertainty. The pandemic is the latest example: Revenue plunged 9% year over year in the quarter ended Oct. 24, 2020, as Cisco's customers paused purchases.
Cisco's strategy has shifted from selling hardware to selling full-on solutions. The company has grown its subscription software business, and it's even bundled some of its networking hardware with software and services to sell as a subscription. Cisco has also found success in the collaboration market, with usage of its Webex video conferencing software surging during the pandemic.
Cisco stock looks like a bargain compared to Microsoft, trading for just over 14 times the average analyst estimate for fiscal 2021 adjusted earnings per share. While Cisco is still working on recovering from the worst of the pandemic, a beaten-down valuation gives the stock a good shot at being a winner over the next few years.
This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.