In The Race of The Three Horsemen of Tech- Google Is the Clear Leader
Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a recent Motley Fool column, Chad Henage explored comparisons between Google (NASDAQ: GOOG), Apple (NASDAQ: AAPL), and Microsoft (NASDAQ: MSFT). He rightfully points out that Google has a higher price to earnings ratio, and much less cash per share as a percentage of market cap, and no yield as compared with the other two tech behemoths.
There is no doubt that in a blind taste test, Google would be the first stock spit out by the investor. However, these aren't sodas. To me the question is: is Google the flavor of the month, or are there real reasons for its higher valuations?
Let's take a look, and compare these 3 stocks, not only based on valuations which Mr. Henage covered, but in terms of what the company is producing.
Mister Softy, with the exception of its gaming division, with its X Box and Kinect devices, has really produced nothing which has caught fire in years (Kinect, in all fairness, is uber-cool and novel. The technology will undoubtedly be adapted for things outside of gaming.)
Its tablet offering, Surface, has performed far below expectations which were not high to begin with. In fact, on the street, while I have seen a zillion iPads, a couple of Amazon Kindles, a few Samsung, one other Google Nexus tablets besides my own; the closest I have come to seeing a Surface tablet in existence is their commercial.
Additionally, Softy’s supposed moat on operating systems is under immense pressure.
I have been a Microsoft loyalist my entire computing life, but, in the last 2 years, have almost fully migrated over to Google. While a year ago I did purchase a new Windows notebook, which I very much like, I find my use and need for it decreasing as I use my Nexus tablet more and more often.
The company is a lumbering giant. Bill Gates spoke of tablet computing years before Apple released the iPad, but Microsoft never created the product.
Their speech recognition software lags far behind Google's, and with more and more use of tablets, and Google Chromebooks in direct competition with lower end laptops, the OS moat might be vaporized much more quickly than investors believe possible.
While Windows Office, Microsoft’s other big cash cow moat has some enterprise cushioning, Google docs are pushing on that door as well.
Apple stock has been decimated since the release of the iPhone 5 due to fears of increased competition and the associated margin contraction.
Investors are suddenly fearful that Apple’s miraculous run of revolutionary products might have come to an end, exacerbated by the passing of Steve Jobs. While this may or not be valid, investors should bear in mind that the iPad and iPhone were three years in development each.
The stock has lost over 10 percent in the last 52 weeks while they continue to pile on cash to their balance sheet.
The iPad (and mini) continue to be the world's best-selling tablets (by far), and with the release of the iPhone 5, Apple has in fact gained market share in the United States.
Unlike Microsoft, Apple’s cool factor is still off the chart with consumers, earned by their combination of artistry and innovation.
Of course, this has attracted intense competition, (as in all good capitalistic systems,) and anticipated price pressures have sent Apple shares spiraling downwards.
One thing is for certain though; Apple's brand globally remains extremely strong. While their percentage of the pie might decrease, the total pie will increase substantially. I anticipate Apple to release a lower price version of their iPhone to try to gain global market share, especially in developing countries, and get more consumers enmeshed into their ecosystem.
One thing that Mr. Henage stated about Google, which struck me as incorrect was the relationship between number of paid clicks for advertising and price per click. He states, “Google is manipulating the cost per click to generate more paid clicks.”
This is an erroneous assumption, as the consumer clicking is not directly paying for how much Google charges the marketing department for the traffic. The supply of clicks is not a function of price, unless Google tries to flood their pages with more and more links to get more consumers to click, and thus driving average price down per click down.
The average price per click being driven down is a function of users switching their searches onto mobile phones, which at least in part due to the smaller screen and security issues, convert less frequently. The number of paid clicks grow as the numbers of overall searches increase. However, as more and more of the clicks come from a lower converting platform, the average price per click drops.
That being said, the question is, why are so many on the street willing to pay so much more for a share of Google versus our other two tech behemoths.
Simple. Mainly, because Google has Majorly Disruptive technology in the pipeline, that we know of. The driverless car, a technology that promises to save society, if employed properly, at minimum hundreds of billions of dollars if not trillions. I have begun writing a series about this which has two parts as now and will grow (Part I) and Part II. Chunka Mui also has written some excellent and well researched columns about this topic at Forbes.
If Google takes even a sliver of the net profits brought to society, even if 5+ years away, the stock promises to, conservatively, double.
Secondly, Google Glass, the wearable cellular device is coming out. Though it will be priced much higher than any existing cell phone ($1,500 is one estimate I have read,) it has already proven to work in an elaborate Google demonstration last summer.
Thirdly, if anybody is going to monetize mobile search it is Google. Along with their strategy of giving away Android for free to OEM’s and thus dominating worldwide market share, Big G has plowed vast amounts of resources into this task.
Fourth, people LOVE working at Google. Here’s one of engineer’s Steve Yegge’s many posts of how awesome it is to work for the company. Posts similar in scope appear everywhere. Google goes out of its way to insure they hire the right people, and if they believe they made a mistake, they are known for letting the person go quickly. Google employees are there to create value for the company.
If this were a car race you’d look at Apple and Microsoft’s shiny cheap multiples and cash as a huge head start in the race for the hearts of investors, but Google has far more under the hood. In this race, it’s Google, then Apple, and Microsoft plodding along waaaayyyy behind.
margiecfl owns Apple, Google, and Microsoft. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!