Apple Inc (AAPL) Is A Better Investment Than Google and Microsoft (MSFT)

Apple Inc (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT): which is a better stock to buy right now? Google’s stock price struggled earlier this year, but the market seems to have remembered that the pan-technology company offers strong growth prospects at a reasonable value. Since the beginning of July, the stock has risen 23%. This has been good news for hedge fund holders of the stock; according to our analysis, Google was the second most popular stock among hedge funds at the end of June (see the 10 most popular stocks) as a total of 114 hedge funds and other notable investors reported long positions in their 13F filings. Google continues to be well-positioned in the search engine industry, and its smartphone and tablet offerings are prospering. Android’s market share crossed above 68% in the second quarter of 2012 according to IDC (a market research firm); another researcher, Gartner Inc., expects that Android-aligned tablets will chip away at Apple Inc. (NASDAQ:AAPL)’s market leadership this year.

LONE PINE CAPITAL

The hedge funds with large positions in Google include some big names. Billionaire and Tiger Cub Stephen Mandel’s Lone Pine Capital owned 1.3 million shares of the stock at the end of the second quarter. According to the fund’s 13F filing this made it Lone Pine’s second largest long equity position, just behind Apple Inc (NASDAQ:AAPL) (see more of Stephen Mandel's favorite stocks). Tiger Global Management, which is managed by fellow Tiger Cub (and fellow billionaire) Chase Coleman and tends to focus on technology and services businesses, owned about 900,000 shares at the end of June (find more stock picks from Tiger Global Management).

Google’s margins declined in its most recent quarter compared to a year ago, but with its 35% revenue growth that didn’t matter very much as earnings increased by 11%. This took place despite a 28% increase in spending on research and development, which in theory should help the company generate growth in the future. Google now trades at a trailing P/E of 21, which is higher than that of its larger technology rivals Apple Inc (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) (which both trade at 16 times trailing earnings). This is the case even though Apple had better earnings growth last quarter compared to the same period in 2011 than Google did, at 21%. Microsoft trades at only 9 times forward earnings estimates, but that figure is artificially deflated due to expected purchases of new Windows and Office software. It is likely still about even with the other two companies once that effect is stripped out, though without an obvious growth engine Microsoft has been forced to pursue a frenzied introduction schedule for new products this year and next year. Overall, Apple Inc (NASDAQ:AAPL) appears to be the best buy of the three. However, even after its acquisition of Motorola Mobility, Google still has $15 billion in cash and $28 billion in short term investments on its balance sheet. We could see continued strategic moves from the company in the future.

Two other peers for Google are fellow Internet players Yahoo! Inc. (NASDAQ:YHOO) and Facebook Inc (NASDAQ:FB). Yahoo’s business has not done well recently, with both revenue and earnings showing slight declines in the second quarter compared to the second quarter of 2011, and it’s actually not priced at much of a discount to Google (NASDAQ:GOOG). It carries trailing and forward earnings multiples of 18 and 13, respectively. We would like to see more plans from new CEO Marissa Mayer before we agree that it deserves that narrow a P/E spread. Facebook’s growth is for real, but it has by far the highest multiples of these companies: it trades at 35 times forward estimates, even after its decline in price following its IPO earlier this year. We think Google is easily the best buy of these Internet companies, with its challenge being how to continue gaining in tablet and smartphone markets. However, overall our favorite stock is still Apple Inc (NASDAQ:AAPL).

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