Google vs. Microsoft: A Value Perspective

As part of our weekly podcast, my colleagues -- myself, CGI co-founder and former Motley Fool analyst, Tom Jacobs, CGI Growth & Value Focus portfolio manager Jason Fitnich and former author of the Circle of Competence blog, Jeff Annello -- discussed the cold war, if you will, between Microsoft (MSFT) and Google (GOOG)

Google announced its new Chrome operating system, a web-based application. Chrome's dependence on internet access may limit its ability to challenge Windows, as consumers still find on-site access to files and programs useful.

In any case, it seems as if Microsoft and Google are locked in a low-grade battle for supremacy as each challenges the other on its home turf. In addition to Chrome, Google has targeted Microsoft's Windows Mobile platform with Android and the MS Office productivity suite with the free Google Docs. Conversely, Microsoft has launched yet another new search iteration, Bing.

Charlie Munger, Warren Buffett's partner at Berkshire Hathaway (BRK.A) for many decades, recently stated he had never seen a company with as wide a moat as Google. It is completely dominant in the search field -- after all, its name is synonymous with search and is used as a verb. Of course, Xerox was similarly dominant in its field a few decades back but has since fallen from such lofty heights.

Our analysts debated whether Google's competitive advantages were stronger than Microsoft's. Google's moat depends mostly on its branding -- it would not be difficult for users to stop using Google and start using Bing. On the other hand, Microsoft's applications have massive switching costs which lock consumers in. Additionally, the Windows operating system has a huge install base that makes it difficult for competitors to gain traction and develop critical mass.

In the GOOG vs MSFT battle, Google is still viewed as a growth company while Microsoft is seen more as a stodgy, slow-growing cash cow (what's wrong with that?). Jason, our growth analyst, finds GOOG attractive from a valuation standpoint. GOOG sports a 20 - 23x price to free-cash-flow ratio, depending on whether stock option expense is considered. However, Google is just beginning to cut costs, which should all flow down to the bottom line. Also, its share dilution has been slowing and FCF growth should make GOOG attractive.

Finally, we wondered if Google was still a growth company. Despite all of its success, some analysts see Google as a one-hit wonder as nearly all revenues come from search advertising. As far as cutting costs to grow net income and cash flow, both Microsoft and Google are reducing headcount but one is seen as a growth company and the other as a boring blue chip.

While Google is developing new tools like Google Docs and Google Reader to bind users more tightly to it, the company ultimately faces the same challenge confronting companies like Facebook, Twitter and even Yahoo! (YHOO): how to monetize their massive user base.

Other topics discussed:

• GM bankruptcy -- what it means for the economy, investors and markets going forward.
• CGI Armory -- dividend investing: When it comes to dividends, a high yield should not be the first thing investors look at.
• Health care costs burdening the American consumer.

See the CGI Roundtable 2009 July 11: GM bankruptcy; Microsoft vs. Google; dividend investing (click to listen or right click and "Save Target As" to download)

Disclosures: none

Comments

[Arthur Hau:]

GOOG is known to be a company full of new technologies and a company that has continued to fail integrating its technologies and that has ignored market demand.

For instance, GOOG has all the nuts and bolts to become a community platform, much more advanced than Facebook. Even with its acquisition of Youtube, a semi-community platform, GOOG chose to stay away from the community platform concept. BTW, what are the differences between a Youtube user profile and a Youtube community and a Facebook user profile and a Facebook group?

Now, GOOG tries to develop a Linux browser/OS ignoring the failure of Linux as a competitor of MS Windows in the past. The net does not provide GOOG with an edge for beating MS. Unless Chrome OS can overcome all the inconvenience of Linux, such as application compatibility, hardware compatibility, user compatibility, etc, Chrome is nothing more than another version of Linux with a build-in browser.

If GOOG cannot integrate all its little but advanced technologies, it will eventually fail like Sun Microsystem. Google wave is an attempt to integrate some of its technologies. However, Google wave is never intended to become a community platform, and therefore, is just another nut or bolt like Youtube, gmail, Google news.

Isn't document real-time coauthoring a community concept that works well under a community platform? Think about it. Chrome OS can also become a community concept. Imagine when you have an OS that boots into a browser that automatically opens your blog together with a community of friends and interest groups. Now, your desktop becomes a community. When you turn on your computer, it will be like going to school, going to your workplace, or going to a party.

For me, IGoogle is a great concept but it can only serve as a transition concept. Google needs to have CGoogle, community based Google. CGoogle should integrate Wave, IGoogle, Youtube, Blogger, Chrome browser, Chrome OS, Picasa, ... Only by doing this can GOOG replace MS's good old self-centered Windows.

Yes, GOOG is still a growth company. No doubt about that. But I am afraid it will be growing in a wrong direction, just like that of Sunw!

Jul 16 12:46 PM