Sell Apple and Buy Google and Microsoft
Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Is Apple (NASDAQ: AAPL) a great company? Yes, without a doubt. The maker of the iPod, iPhone, iPad, and Mac generates over $100 billion in revenue every year. The company has killer products, loads of cash, and has a cult like following. However, all that takes a back seat when one realizes that the market cap of Apple is greater than Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) combined.
Apple > Microsoft + Google?
The following table summarizes the three companies.
| In Millions | 2011 Revenue ($) | 2011 Net Income ($) | Tangible Book Value ($) | Market Cap ($) |
| Apple | 108,249 | 25,922 | 106,285 | 548,500 |
| 37,905 | 9,737 | 46,739 | 207,700 | |
| Microsoft | 69,943 | 23,150 | 49,741 | 249,400 |
| Google + Microsoft | 107,848 | 32,887 | 96,480 | 457,100 |
| Apple - (Google + Microsoft) | 401 | -6,965 | 9,805 | 91,400 |
As shown on the table, Apple generated more revenue, but earned about $7 billion less than Microsoft and Google. This is countered by about $10 billion more in equity that Apple has over Google and Microsoft. Looking at growth, Apple’s revenue has been exploding and makes the company look like a complete steal. In the last five years, Apple has averaged a monster annual growth rate of 41.16%. In contrast, Google and Microsoft averaged 29.01% and 7.60%, respectively.
However, assuming that Apple will be able to sustain such a large growth rate is equivalent to ignoring the competition. Apple reinvented the smartphone and tablet (Microsoft invented the tablet) and caught its competitors by surprise. As a result, Apple has been growing quickly. However, competition is rapidly increasing and it is uncertain how Apple will fare.
Samsung, Apple’s great rival, reported record profits in the second quarter and an increase in revenue of 48% year over year. Samsung’s profits from its handset division more than doubled year over year. The company is estimated to have sold 50.5 million smartphones, almost double the 26.0 million iPhones Apple sold. According to IDC, in the second quarter Samsung’s smartphone market share climbed from 17% in the previous year to 32.6%, while Apple’s market share declined from 18.8% in the previous year to 16.9%.
On the tablet side, competition is also rapidly increasing. The Google Nexus 7 tablet is gaining market share and is priced at just $199. In contrast, the New iPad starts at $500. Moreover, Microsoft is planning to release Windows 8 on Oct. 26. Along with Windows 8, Microsoft will release Windows RT, which is a version of Windows 8 designed to run on ARM (NASDAQ: ARMH) chips.
Microsoft is planning to launch a Windows RT Surface tablet and a Windows 8 Pro Surface tablet. Windows RT Surface will run on Nvidia’s Tegra SoC, which uses an ARM CPU. Windows 8 Pro Surface will run on Intel (NASDAQ: INTC) chips. According to Intel, the company is working on 20 Windows 8 tablets. The tablets will be using Intel’s Clover Trail chips. This is especially troubling for Apple because all these companies will be promoting a Windows 8 tablet. ARM will be touting Windows RT tablets, Intel will be touting Windows 8 tablets, and Microsoft and other OEMs will be touting Windows tablets. That is a lot of competition heading in Apple’s direction.
No, Microsoft + Google > Apple
Google and Microsoft own better assets than Apple. In contrast to Apple, Microsoft and Google have proven monopolies. Google has faced stiff competition in the online search market for years and has kept its monopoly. From 2007 to 2012, Google actually increased its search global market share from 79.01% to 81.34%. Furthermore, since only about one third of the world population uses the internet, Google has plenty of room to grow.
Additionally, Microsoft Windows currently has a 92.15% market share of desktop operating systems. While this is slightly down from a 95.80% share in 2007, it is still over 90% (netmarketshare). Furthermore, Microsoft Office has more than a 90% market share of the PC market. Microsoft Office has remained dominant in the face of OpenOffice, Google Docs, and other cheap or free alternatives for years. Microsoft and Google own battle-tested monopolies.
Also, Google owns YouTube and Android and Microsoft owns Xbox. The online video market, mobile device operating system market, and video game market all have strong potential. The number of videos watched online and the mobile device market are experiencing explosive growth. While video games sales have slowed, the market will be around for a very long time and Microsoft has a dominant position.
In contrast, Apple’s assets are riskier. In its most recent quarter, the iPhone and iPad accounted for 46% and 26%, respectively, of Apple’s total revenue. However, the smartphone market is very fickle and changes often. Palm, a former leader, is dead. Former leaders Nokia and RIM are struggling mightily. Basically, the smartphone market is an unreliable revenue source and it accounts for 46% of Apple’s revenue. This is not good. Its other main revenue source, the iPad, is in a new market that is about to see a major boost in competition. There are dark clouds hanging over Apple’s two main products.
In addition, Steve Jobs is dead. Love him or hate him, the man maneuvered the company from the brink of bankruptcy to record profits. Without his visionary ideas, it is hard to say if Apple will be able to come out with more disruptive products. It is another unknown factor with Apple.
In conclusion, Apple is a great company. However, Apple’s market cap is also about $91 billion greater than Microsoft and Google combined. Either Microsoft and Google are underpriced or Apple is overpriced. Either way, buying Microsoft and Google, instead of Apple, gives investors more bang for their buck. In addition, Microsoft and Google hold better assets than Apple. The Microsoft and Google package is a superior investment to Apple.
Alvin owns shares of Microsoft. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
