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Ten years ago it looked like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) would be friends forever as they battled the 800 pound gorilla named Microsoft (NASDAQ:MSFT). Google's CEO Eric Schmidt sat on Apple's board and the two Silicon Valley companies operated in different markets and complimented each other nicely.

Things are not so nice now. In 2011 Apple and Google are 800 pound gorillas going toe to toe in some key markets. With Microsoft fading into irrelevance (too soon?), the iEmpire in Cupertino and the sultan of search in Mountain View now stand face to face, fighting for the future of technology.

To understand which is the better stock we need to know, among other things: Which is the better technology company? Let's look at some of the key markets and compare products/services.

iOS vs. Android

The iPhone changed the game, rewrote the rules and, not inconsequentially, earns Apple more than $600 per unit sold. iOS offers an intuitive and user-friendly experience and the OS gains more power and capabilities with every iteration.

Android is an upstart. A start-up bought by Google in 2005, this mobile operating system has gone from "question mark" to undoubtedly the most widespread mobile OS out there for smart phones. Users are activating more than 300k new droids per day! They're everywhere and while Google doesn't make much money from Android it does get to dominate mobile search.

This race is neck in neck but with Apple earning all the money and providing (in my opinion) a better user experience, they are the winner. They have the better appstore, the better music store, nicer hardware and an ecosystem of services and devices which culminates in a virtuous cycle of user "loyalty" and profits.

The iPad is far and away the leader in the tablet market and while Google's Honeycomb will add value to Android based tablets, this market is owned by Apple and will be for years to come.

Among the other mobile OS competitors Nokia's (NOKIA) Symbian is toast, Microsoft's Windows Mobile has great commercials but has yet to prove it's worth and Research in Motion (RIMM) seems like a great technology company that lacks the clout to dominate. Perhaps it's a takeover target down the road. Rumors suggest that Nokia may be adopting Microsoft's Windows Mobile OS which should help Mr. Softy challenge Apple and Google but in reality it seems like a battle for third place.

Apple Is Winning The OS War

Google's Chrome OS is ahead of it's time, still difficult to imagine, and it might never become a real threat to Apple's OSX. But maybe it will and if Google's vision of the world comes to pass and we do end up in Google's cloud the battle would intensify.

But right now I believe that Apple's OSX has a commanding lead and with OSX "Lion" on its way that lead looks safe. All the other companies out there have been chasing Apple for 2 or more years and showing no signs (yet) of catching up. This lead is easy to overlook and under-appreciate but it provides Apple with a HUGE competitive advantage.

Google will put up more of a challenge in the future and Mircosoft still has clout in the enterprise space and big market share with low-end consumers but these advantages are fading, while Macs proliferate.

Hardware

It is a given that Apple's hardware (the iPhone, iPad, Macbooks etc.) are the best in show. The products are mind blowing works of art with tremendous functionality. Apple earns huge margins on hardware and has users locked into their ecosystem which translates to steady upgrade cycles.

Google tried it's hand in hardware, failed (Nexus1) and now seems fully focused on the software side. The next hardware designs out of Google will be more ready to challenge for relevance but for now big G is not even close to second place.

Internet

Google is the king of search and while the barriers to entry in this market are not high, Google has become so synonymous with search that it has even become a verb. Apple is not a player in search (yet) but I would not be surprised to see them enter the market in the next few years, either by way of acquisition or a homegrown product. Right now Google earns almost 90% of it's revenue from search and will fight for every percentage point of market share, be it against Bing or Apple's future "iSearch."

Google is also a major player across the web with Youtube, Google Docs, Gmail, Blogger, Analytics and on and on. Apple tried mobile me, which is irrelevant at best, hugely frustrating at worst and has left the Cupertino company with little presence on the web. iTunes of couse is a web based store but I have included iTunes in the smart phone, mobile OS arguments above. In short, the Internet belongs to Google.

Valuations

Trading at only 12 times 2012 estimated earnings, sitting on 60 billion in cash and growing revenues at better than 50% a year Apple is an unstoppable, undervalued financial juggernaut. In my opinion shares are worth more than $400 right now and could be on their way to $500 by mid 2012.

Google is also trading at a discount to its worth. At 23 times TTM earnings and 15 times estimated 2012 earnings, shares appear to be undervalued, given the 30% revenue growth. Google has about 35 billion in cash with 3 billion in debt. I think shares could be worth better than $700 by the end of the year.

And The Winner Is?

I own shares of both companies but if given the choice of owning only one I'd choose Apple. Apple is simply dominating, taking market share, expanding margins and locking users into the i-ecosystem. Both stocks recently fell victim to headline risk with the Steve Jobs' leave of absence and the new Page at Google but the fundamentals behind both stocks remain strong. Based on valuation, product mix and software excellence I think Apple is the better stock.

Disclosure: I am long AAPL, GOOG.
Source: Apple vs. Google - Which Is the Better Stock?