The house rules of this weekly column are simple:

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Microsoft (Nasdaq: MSFT).

If Steve changed his name to "Microsoft," would he be M. Ballmer?  
Microsoft has turned heads this week after being downgraded by both Goldman Sachs and Janney, with each firm slashing its price target for the world's largest software company. My own uber-bearish "Why Microsoft Will Never Be Great" column on Monday was controversial enough to land me on CNBC yesterday afternoon. Why should I pile on again?

After all, Motley Fool Inside Value -- one of our market-beating newsletters -- has recommended Microsoft for ages. The odds are stacked against me on this call.

However, I feel that some of the bullish arguments readers eloquently raised in response to my Monday piece deserve addressing.

PhoolishPhilip posted one of the best rebuttals that I've seen in a long time, breaking out how Microsoft's revenue and earnings have grown from 2000 to 2005, and then again to 2010. He then illustrated Mr. Softy's knack for returning money to investors in recent years through dividend checks (which pad shareholder pockets) and buybacks (which expand earnings per share).

However, as we all know, lower top- and bottom-line multiples aren't an indicator of value. The future for Microsoft at the turn of the millennium was brighter than it was in 2005, bubble notwithstanding. The same thing goes 2005 in comparison to 2010. The 2010 thesis of "Microsoft is cheaper now" failed in 2005, and it will fail again.

PhoolishPhilip does a great job of retracing Microsoft's past, but when he proposes that the company will be pocketing $18 billion-$20 billion in free cash flow annually "for the foreseeable future," I suspect his crystal ball could use defogging. Operating systems, enterprise solutions, and productivity suites will continue to get cheaper and more competitive. The cloud says so.

I'm not asking for Steve Ballmer's sweaty head. I think he's doing a pretty good job. The leveling of the playing field isn't his fault, but Microsoft's former greatness will be the biggest victim of the legitimacy -- finally -- of open-source solutions and the cloud computing revolution.

Microsoft's growing revenue in the single digits, and earnings in the pre-teens, will only continue to decelerate. I'll explain why while I list this week's trio of potential replacements.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.

Red Hat (NYSE: RHT)
The "open source will kill Microsoft" chatter is old hat (pardon the pun), but Linux has finally evolved at the enterprise level. Red Hat sells enterprise subscriptions, giving companies the confidence to go with a cost-effective platform.

"Linux is now a reliable and respectable choice for serious, supportable business use," Anders Bylund explained in covering last month's quarterly report, in which Red Hat grew its top line by 20%. Microsoft bulls seem to view the popularity of cloud computing as an opportunity, but in reality, server-stored solutions will make computing an operating-system-agnostic experience.

Apple (Nasdaq: AAPL)
You saw this one coming, but my selection isn't a fanboy thing. No matter where you turn, you'll find either Apple or Google (Nasdaq: GOOG) -- and in many cases both -- angling to take market share from Microsoft.

From browsers to smartphones to tablets, and even into the realm of $0.99 and free casual games that have led the video game industry into a nearly two-year funk, Microsoft finally competition worth fearing. Apple tackles up high, while Google goes down low. Microsoft isn't going away, but it's in for a bruising over the next few years.

"A series of stumbles in mobile has lead the company to a position where, in our view, it is becoming quite difficult to catch up -- and this is the direction in which computing platforms are moving," Janney analyst Sasa Zorovic writes in yesterday's bearish note. Next week's unfashionably late arrival of Windows Phone 7 will leave Microsoft behind Apple, Google, Research in Motion (Nasdaq: RIMM), and Nokia's Symbian. It may catch up to one of those competitors, but it's unlikely to walk away with a medal.

Best Buy (NYSE: BBY)
With so many gadgets and platforms duking it out, investors hesitant to place specific wagers can just buy the lot in Best Buy. After last year's liquidation of Circuit City, Best Buy doesn't have to look over its shoulder for supremacy in consumer electronics. Digital distribution -- and e-commerce in general -- are liabilities, but consumers still need convenient access to hard goods in this space. Best Buy trades at a reasonable 11 times this year's projected earnings, a bargain compared to faster-growing e-tail juggernaut (Nasdaq: AMZN). Yes, Microsoft has a slightly lower multiple, but those clinging on that nugget are missing the point. Mr. Softy is set to lose market share and pricing power in nearly all of its lines. Best Buy is the better buy, warts and all.

I'm a fan of Ballmer. I love Bill Gates' philanthropic ways. Unfortunately, Microsoft is going down a narrowing road, with no way to shift into reverse.

Best Buy, Google, and Microsoft are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Apple,, and Best Buy are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended buying calls on Best Buy. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Best Buy, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Longtime Fool contributor Rick Munarriz doesn't mind taking out the garbage every so often. He does not own any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.