3 Tech Stocks To Buy Now For Profits In 2013

| About: Microsoft Corporation (MSFT)

Google (NASDAQ:GOOG) may face competition from collaboration between Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB) in its bread and butter internet search. Investors may wish to play the relationship between Microsoft and Facebook by buying the cheaper of the two, Microsoft. Shares of this tech bellwether would gain from any web shake-up while avoiding the high prices and imaginative valuations typical of IPOs, and which are probable for Facebook's overhyped IPO.

The Threat is Bing

Bing is Microsoft's search engine which competes with Google in the search space. The latest version of Bing has a social sidebar with features that accelerate sharing of search results to Facebook's social network. Essentially these features reduce the clicks and hassle needed to tell your Facebook friends about your latest web exploits. This is the social media equivalent of taking a picture instead of sketching a picture of something you want to show your friends.

What if Bing Gains?

What if this makes Bing more popular and Microsoft takes a bigger bite out of Google's search sandwich? The consequences for Google are severe. According to Google's latest 10-Q filing, search and advertisement revenues accounted for $10,225 million in revenue, while everything else Google does accounts for only $420 million of firm revenues. That means that 96.1% of revenues are from web search, while all the other projects Google dabbles in are a 3.9%-of-sales side show.

Bing is a very real threat for Google. Its success could take away Google's bread and butter.

What if Bing Stalls?

If Bing continues to muddle along as a minor nuisance for Google's search business, then Google will basically look the same as it does today. It will continue to dominate internet search with a 70% market share. The upside on this is okay, but not a spectacular result for Google.

The downside for Microsoft is fairly minimal. Remember that Bing is something of a side project for Microsoft, a firm whose landmark products are Windows, Office, and the X-Box.

Replicating Google's Projects with Cheaper Stocks

Google seems like a triple play on traditional search, smartphones, and a long-shot for social media through its launch of Google+. There are cheaper ways to invest in its competitors in each of these businesses:

Social Media: Microsoft has a large 1.6% stake in Facebook. At a valuation of 96 billion, this stake is worth $1.5 billion.

Smartphones: Apple (NASDAQ:AAPL) is trading at lower price multiples than Google.

Traditional Web Search: Microsoft has Bing and Yahoo! (YHOO) is also a player in web search.

Company

P/E

P/S

P/FCF

EPS past 5Y

EPS next 5Y

Microsoft

11.33

3.58

12.17

17.63%

8.85%

Apple

13.82

3.72

11.88

64.95%

18.92%

Yahoo!

17.26

3.71

21.28

9.62%

13.94%

Google

18.35

4.94

16.54

24.52%

18.47%

Microsoft is a better value than Google, and it is expected to have healthy growth even without its Facebook collaboration. Microsoft stock trades at price multiples which are low by absolute standards, and are consistently lower than the price multiples of Google. Though Google has seen higher earnings growth and is expected by analysts to have higher growth in the future, this trend and these expectations could change based on its involvement with Facebook.

Inroads to search could rejuvenate Microsoft as a business and as a stock. Social media exposure could improve analyst disposition toward Microsoft, serving as a catalyst for higher growth estimates and higher valuations, too. Progress in search would give credence to Microsoft as a growth stock once again, and the stock could experience multiple expansion and return to long-forgotten growth price multiples. Investors would be rewarded generally for buying Microsoft at value prices and selling Microsoft at growth valuations.

Apple is a cheaper stock than Google with better growth prospects. Apple trades at a lower price-to-earnings multiple, a lower price-to-sales multiple, and a lower price-to-free cash flow multiple than Google. It also has higher expected growth according to analyst projection and as an extrapolation of recent growth trends. At today's prices, Apple is clearly a better way to play the smartphone market.

What about Yahoo!? Yahoo! is a value play because it is trading for less than the sum of its parts. Yahoo!'s 35% stake in Yahoo! Japan is said to have an $8 billion market value. In addition, Yahoo owns roughly 40% of Alibaba, which was valued at $32 billion last year. Analysts anticipate that Yahoo!'s 40% stake is worth more than the $12.8 billion implied by last year's valuation. Thus, ownership in these two Asian web properties amount to $20.8 billion. Since Yahoo! is currently trading at a $18.6 market capitalization and has $2.2 billion in debt, all of Yahoo!'s other assets are basically trading for free based Yahoo!'s $15/share market price. Thus, this is an opportunity to replicate Google's search business through its competitor essentially for free.

A portfolio of Microsoft, Apple, and Yahoo! is an optimal investment relative to Google. These three firms are either reasonably priced or are trading for less than the sum of their parts. Moreover, Microsoft's stake in Facebook makes it a cheap way to get on board the Facebook IPO. Each of these three companies generates revenue and income in different markets from many distinct products. This diversification is not present in Google which is overwhelmingly an internet search company, with less than 4% of revenues coming from side projects. The combination of Microsoft, Apple, and Yahoo! is a real way to buy a diversified tech portfolio at reasonable prices, whereas Google is concentrated search at higher valuations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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