Buy Google, Microsoft Over Hot Stock Apple
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When Apple (NASDAQ: AAPL) released poor 2Q12 results, it as if you could have a heard million hearts drop. Its EPS of $9.32 was 10% below expectations and a giant wet blanket to those giddy from strong performance in the preceding two quarters. While Apple has been a tremendous company, it is now coming against the law of big numbers. By my calculations, it is actually overvalued against peers on a present value basis if it becomes the first trillion dollar company by 2016.
From iPods to iPhones to iPads, Apple has "wowed" the market time and time again. Expectations about Apple TV have kept the bulls optimistic that this momentum will continue, but I believe that the market has not paid enough attention to the market at large. The truth is that technology has few barriers to entry. Apple's aggressive attempts to pursue competitors over "copying" their tablet design, for example, illustrate a level of "clingingness" that goes inherently against the way technology moves… namely, forward. If Apple continues to rely on its brand image from previous hit products over the next 5 years, it may be in for a big disappointment when it learns that consumers are more fickle than once thought.
On that note, I encourage investors to buy shares in Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOG). These two tech companies may have become boring of late, but they have solid fundamentals, sustainable economic moats, supportive diversification, and strong top management. Microsoft recently released their new tablet, and, like how Google's social network is better than the leader in functionality (more on that later), Microsoft's new surface tablet is better than Apple's. Opportunistically, it is slated to retail at attractive price points that remind consumers about Microsoft's core advantage: pricing. Over the years, Apple has been able to get away with charging a premium based on the perception of quality. While it is true that Apple products are generally more integrated, the question remains, for example, is 1 MacBook Pro equivalent to 3 new PCs?
And, most importantly, the tablet does the most to translate PC functionality into a touchable screen. By showcasing the product with a keyboard, Microsoft has suggested that its product can do everything an iPad can… and more… and at a more attractive price. This emphasis helps to eat away at some of Apple's core appeal.
In the long-term, Microsoft is not going anywhere but up. EPS growth has been good and, in my view, the company is positioned to offer a larger dividend increase than it has over the past 8 years or so. According to FINVIZ.com, the software producer is currently rated a 1.9 out of 5 where "1" is a "buy". And with forecasts for 9% annual EPS growth over the next 5 years on a 9.1x forward multiple, upside far outweighs the downside.
Google, similarly, has lost much of its appeal of late. While one might be given to arguing that the company's core search business is not sustainable, the true value can be found in diversification. Google has extended itself in mobile through Android, extended itself in video through YouTube, extended itself in email through Gmail, extended itself in web browsing through Chrome, and is now attempting to extend itself in social networking through Google+. All of these have begun to be integrated into search results for a complementary user experience.
Some have argued that Facebook represents a significant threat to Google. In my view, however, Google+ bests Facebook. From Google Hangouts to the implementation of "Circles," Google+ has a lot to offer. While everyone keeps talking about the ~1 billion users on Facebook, they fail to appreciate the number of people searching Google each day. Google is still the most popular website on the internet and had 35% more individuals visiting last month, according to Quantcast. In addition, the company can also push for Facebook-to-Google+ conversions through soliciting in search results, Gmail, and other platforms. Google can advertise itself and - just like how it switched people over from AOL instant messaging to Google Chat and from multiple beloved email boxes to Gmail - it can do the same in social networking. I thus strongly encouraging buying shares now.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple and Google. 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.