There I Said It: Buy Google, Microsoft Over Apple
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) may have both recently soared to their highest historical levels, but only one is truly undervalued: Google. Microsoft (NASDAQ: MSFT), on the other hand, is obviously well below its high from the dot-com era. Although Microsoft was worth about $489 million at the height of its power before 2000, this was 23% lower than Apple’s current valuation. Thus, Microsoft has become under-appreciated.
First, let's distinguish Apple from Google. Apple has released a slew of attractive products of late, ranging from the iPhone to the iPad. They have caused sales to surge each time. However, sales of the iPhone 5 have been lower than anticipated. Perhaps consumers are starting to realize that the iPhone has a lot of attractive substitutes, like Google's Android for example.
In fact, Android has considerably more market share than iOS and is well positioned to cross-sell products. Androids have had LTE for some time now and are better integrated with the world's most popular search engine. As the first Apple phone to run on the fastest wireless network (and with the addition of better battery life), investors were expecting big things from the iPhone 5. Instead, the benefits were not enough to motivate as many upgrades to the new phone as had been expected.
With Apple's valuation as big as it is and Google's at more than 60% lower, I strongly encourage buying shares in Google.
What impresses me so much about Google (and what I think investors fail to appreciate) is the firm's excellent integration. From Google+ to Gmail to YouTube and Android, the business is very well laid out in all communication markets within tech. This makes the company surprisingly stable in what is increasingly thought of as an intensely competitive business. The fact is that Android has well exceeded iOS in market share and adds much more value for Google than iOS does for Apple. Whereas Apple relies on iOS, Google's Android is more of a powerful auxiliary to the main business.
Everyone sort of thinks as Apple as this house of innovation, but the truth is that innovation can only run so far before running head first into consumer unpredictably. The desperation evident in suing businesses like Samsung for patent infringement demonstrates a corporate environment that is becoming, dare I say, self-obsessed. The problem with Apple is that it seems to almost be jealous of itself - engraining its users with a cult-like mentality. While this may have led to explosive short-term results, the long-term picture can be very different. What stops Microsoft or Google, which have actually produced near monopolies in their fields, from also being innovative?
In fact, Google is not resting on its laurels. Co-founder billionaire Sergey Brin is now principally engaged in Google X, which prides itself in shooting for "pie in the sky" ideas. They are aiming to release virtual Google glasses within the next year or so, which are a pretty cool "why not?" gadget to buy (okay, maybe the price tag is one reason why not). The main idea, however, is that they are testing out new items that could create new markets. With a great diversification in mobile and Internet, Google has (in my view) the best means to market its products.
Unlike Google, Microsoft has become a bit boring over the years. Unlike Google, it has failed in mobile and search. But like Google, it is substantially undervalued and worth just 40% of Apple. Analysts currently rate the stock a "buy" and forecast 8.8% annual EPS growth over the next 5 years. Given how consistent earnings have been for Microsoft, there is much safety in these low gains (only 180 bps more than what was achieved annually in the past 5).
Over the years, however, Microsoft has mostly relied on organic growth. Equipped with a strong balance sheet that has a quick ratio of 2.6x, Microsoft also is now in a good financial position to perform accretive takeover activity. Margins have been on the increase, and ROA, ROE, and ROI are all in the double-digits. At 9.2x forward earnings, the business is at a substantial multiples discount to Apple's 12.7x. I believe this gap will close as investors realize (1) how fickle tech consumers are and (2) how Microsoft's near-monopoly position in operating systems is under-appreciated. Accordingly, I encourage an investment in Microsoft as a means to bet against the Apple hype.
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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.