In this Motley Fool series, we rank three related stocks on five criteria to determine the best buy.
Today's matchup is to crown the king of big tech.
We're pitting Apple (Nasdaq: AAPL) against Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT). Although they encroach into each others' spaces often, each is dominant in its space.
By using five short-of-scientific-but-carefully chosen criteria, let's determine which of these three stocks is the best buy (assuming we have to buy one).
Round 1: Balance sheet
Each of these companies has almost comically strong balance sheets. Together they have more than $150 billion more cash than debt. It would be splitting hairs to rank one above the others, so I'm calling this one a three-way tie.
Rank: (1) Apple, Google, and Microsoft (tie).
Round 2: Operations
This is another tough one, because each is dominant operationally. We'll do this one looking at two sets of numbers: return on equity and net margins. Because Apple and Google tend to beat up on Microsoft in some high-profile areas where they compete (Apple in smartphones and Google in smartphones and search), you may be surprised that Microsoft beats them both on return on equity (44%) and net margins (33%). Microsoft's cash cows -- Office and Windows -- still generate tremendous profitability. Meanwhile, Apple has higher returns on equity than Google (42% to 20%), but Google beats Apple slightly on net margin (27% to 24%). However, Apple's margins are amazing given that it's primarily a hardware manufacturer.
Rank: (1) Microsoft, (2) Apple, and (3) Google.
Round 3: Growth
Here's where Microsoft falters a bit. But not as much as many would think. Over the past five years, it's grown its earnings per share by 17% per year. Not bad for a "mature" company. It's running against thoroughbreds here, though. Google's grown EPS 30% per year and Apple's posted an unbelievable 65%. Looking forward, Microsoft has the lowest top-end growth prospects, and it's debatable whether Google or Apple has the better prospects.
The hard thing about assessing growth here is that it can quickly come to a grinding halt. We've seen that recently with Netflix (Nasdaq: NFLX), which lost 800,000 subscribers last quarter, and Research In Motion (Nasdaq: RIMM), whose BlackBerry smartphones are fighting obsolescence in the face of iPhones and Android-based smartphones. In each case, the stocks of these onetime highfliers have come crashing down. Even Apple, Google, and Microsoft aren't immune to competition, innovation, and the fickle consumer.
Rank: (1) Apple, (2) Google, and (3) Microsoft.
Round 4: Price
For Microsoft's lower growth and concerns over its ability to keep milking its cash cows, we're getting a bargain-basement price. Even without factoring in its giant cash load, Microsoft trades at less than 10 times trailing and forward earnings. Apple's price multiples aren't much higher, and Google's are only a bit higher than the market average.
Rank: (1) Microsoft, (2) Apple, and (3) Google.
Round 5: CAPS rating
Out of a maximum of five stars, our CAPS community rates Google four stars and both Microsoft and Apple a middling three stars.
Rank: (1) Google, (2) Microsoft and Apple (tie).
The summary rankings
|
Category |
Apple |
|
Microsoft |
|---|---|---|---|
| Balance sheet | 1 | 1 | 1 |
| Operations | 2 | 3 | 1 |
| Growth | 1 | 2 | 3 |
| Price | 2 | 3 | 1 |
| CAPS rating | 2.5 | 1 | 2.5 |
| Average finish | 1.7 | 2.0 | 1.7 |
Sometimes this exercise goes as I thought it would go, and sometimes it doesn't. In this case, Apple and Microsoft tied for the win, with Google close behind. This result jibes with my personal investing, as I continue to hold shares of Apple and Microsoft. Google, like Amazon.com (Nasdaq: AMZN), is a company I don't own yet but that I'd love to buy given a price dip.
I want to emphasize that there can be multiple stock winners here. Apple, Google, Microsoft, and Amazon all compete with each other in various ways, but investing in one doesn't preclude investing in the others. It's the companies that have to compete with these powerhouses that I worry more about.
So be patient and check out each of these companies if you want to invest in the tech space. For another stock idea that capitalizes on the data boom that will lead to a quadrupling of Internet traffic by 2015, check out the Motley Fool report called "The Motley Fool's Top Stock for 2011," which highlights a company that's set to profit handsomely from the booming amounts of data flowing across the Internet, no matter which company delivers the video. Find out the name of that company for free.
