Just as when marriages end in divorce, the dissolution of a corporate alliance leads to people picking sides.
The biggest such alliance in history has just broken up, with Microsoft (NASDAQ:MSFT) announcing that its Windows 8 operating system will work on ARM processors, not just those of Intel (NASDAQ:INTC), and Intel in turn entering a chip-making partnership with Google (NASDAQ:GOOG) aimed at increasing its share in the mobile market.
Whose side are you on?
Regular readers will note that I own some Intel. It did very, very well for me in the 1990s, but it has gone nowhere in the last decade. This is partly a property of Moore's Law, which requires increasing financial scaling over time. It's partly the law of big numbers. Percentage growth slows as the top line gets bigger.
I have never had any Microsoft in my portfolio but now might be a good time to take a flyer on it.
Yes, its cloud strategy is proprietary in an open source industry, and yes, its former monopoly of Windows and Office is circling the drain. But they are finally getting in gear with the concept of an “ecosystem,” in which vendors control markets, hardware and services together.
I have had some Google for some time. They have the ecosystem Intel is trying to tap into, because with Motorola Mobility (NYSE:MMI) the company will be actually producing hardware to go along with its market and its cloud.
Like the other two, Google is also coming up against that law of large numbers, although not to nearly as large a degree. Google had sales of $29 billion in its latest fiscal year, against Intel's $43 billion and Microsoft's nearly $70 billion. The needle is harder to move in Microsoft's case, so advantage Google.
Also like Microsoft, Google is getting into government's cross hairs. But while Microsoft has learned to adapt to that, and actually sent the government packing, Google is just entering its regulated era. Advantage, Microsoft.
Now commenters will quickly note that Apple (NASDAQ:AAPL) is the company all three of these firms are following, and why buy a follower when you can own the leader? Apple nearly equals Microsoft in revenues, but should pass it next year, and even at its current price it sports a PE of 15, against less than 10 for the former Wintel partners. (Google's PE is even higher than Apple's at 19.)
The counter-argument is that, while Apple has first-mover advantage in what we might term the “ecosystem” market, all three of these rivals now have a roadmap they can use to either gain “second mover advantage” through a more open system (Google) or a solid second position in the market (Microsoft) that could lead to accelerating growth. Give Microsoft Apple's PE and you're looking at a $37/share stock.
It gets a little more complicated. One reason Intel is working so hard with Google on low-powered chips for Android is that Apple is demanding lower-power chips from Intel as the price for continuing to buy from it. Success would also give Intel a better shot at selling chips into the fast-selling iPad and iPhone markets.
As Stephen Sondheim wrote in “Sunday in the Park with George” ... “having just a vision's no solution, everything depends on execution.” We know Apple can execute in this environment. Can Microsoft? Can Intel? Can Google?
The answer is yes.
Every market leader needs a follower, a rival if you will. Every Coca-Cola needs a Pepsi, every Wal-Mart needs a Target, for every GM there's a Ford. To use a sports analogy, for every Muhammad Ali you need a Joe Frazier. (See Holmes, Larry.) With a rival you both get profits and build business legends.
Right now the market is betting on Google for this second place, because Android is more open so it benefits from the success of Amazon.com (NASDAQ:AMZN) and Samsung (OTC:SSNLF), among others. But if I were going to speculate, I'd say Microsoft is due for a comeback.
What do you think?
Disclosure: I am long GOOG, INTC.