Why Investors Should Go Long Google

| About: Alphabet Inc. (GOOG)

Google's (NASDAQ:GOOG) Q3 earnings fell well below expectations, forcing the Nasdaq to drop 1 percent after the earnings report went live in the middle of the trading day, instead of after the closing bell, causing a suspension of trading. P/E estimates were revised and showed a downhill chart (as per Nasdaq data) from the 2011 actual of 22.91x to 20.11x (2012 estimate) to 17.14x (2013 estimate) and finally down to 15.11 (2014 estimate) as many investors grappled with the question of whether Microsoft (NASDAQ:MSFT), with a P/E of 10x (approximate), was a better bet.

But for the long-term investor, here's a reminder why it is not.

Google reported a net profit at $2.18 billion or $6.53 per share, down 20 percent, compared to $2.73 billion or $8.33 per share in the same period a year ago. Non-GAAP earnings per share are at $9.03 compared to $9.72 year-over-year. However, the highlighting factor is that the company reported an increase in revenues by 45 percent from last year to $14.1 billion.

The U.S. market for Internet search grew at 11 per cent last December. Google controls 66 per cent of that business. At the same time, global shipments of PCs fell by 1 per cent last month. Microsoft's primary market is selling software for personal computers. That was backward looking data. Let us look at the way forward.

Research shows that, by 2013, mobile phones will overtake PCs as the most common Web access device worldwide and that by 2015, over 80 percent of the handsets sold in mature markets will be smartphones. However, only 20 percent of those handsets are likely to be Windows phones.

Windows 8 is Microsoft's big bet, and it remains to be seen how they might perform in real-world environments and how users respond. With consumer-targeted Windows 8 devices, enterprises won't be able to force users to either give up their iPads or prevent the use of Windows 8, but will need to support a greater variety of environments. This would reduce their ability to standardize the personal computer. The era of PCs with Windows as the single platform would end and the next era would begin, where Windows is just one of a variety of environments.

Research also shows that by 2015 media tablet shipments will reach around 50 percent of laptop shipments and Windows 8 is likely to occupy third position behind Google's Android and Apple iOS operating systems

Google gets more than 90 percent of its revenue from its search-engine business. Microsoft has spent the better part of a decade trying to challenge Google, but has so far, managed to capture only 15% of the market.

Microsoft's revenue and profits are still overwhelmingly provided by PC and server software. Also, Microsoft's huge push into gaming has provided it with a well-name brand, the Xbox, but has done little by way of boosting its profitability. Meanwhile, Apple (NASDAQ:AAPL) has successfully developed a mobile-computing and communication platform, that is today, the largest threat to the PCs.

In the past, Microsoft has often emphasized the importance of unified messaging, or UM, but now, with Android and iOS, unified messaging are slowly becoming history.

So, while Google is looking at broad horizons in open territories, Microsoft is operating in saturated markets. This defensive mode is causing the company to lose out to competition from rivals in the Technology Sector. In my view, Google tops the pecking-order list, closely followed by Apple and then Microsoft.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.