What’s Next For Microsoft Corporation (MSFT) and Google Inc (GOOG)?

The latest release of quarterly earnings by Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG) present a picture of slowing sales and decreasing ad revenue. The two companies appear to be struggling to find the right products and services to drive their revenue growth. Dealing with decreasing PC sales and a challenging mobile web environment led to results which missed analyst expectations. After the earnings release, Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG) shares opened 3.5% and 9.3% lower the next trading day.

Microsoft Corporation (NASDAQ:MSFT)

Microsoft Corporation (NASDAQ:MSFT) dragged down by PC market

Fourth quarter results for Microsoft Corporation (NASDAQ:MSFT) showed the impact of continuing declines in the PC market. Net income for the period ended June 30 was $4.97 billion and diluted EPS was $0.59 per share versus a loss of $492 million, or ($0.06) per share. The results reflect a $900 million write-down related to the company’s price cutting on its Surface RT tablets, which affected EPS amounts by $0.07. According to USAToday, analysts polled by FactSet were expecting EPS of $0.75; revenue was expected to come in at around $20.7 billion and instead was $19.9 billion.

Despite the disappointing results, Microsoft Corporation (NASDAQ:MSFT) had strong demand in its enterprise and cloud offerings. For example, Server & Tools fourth quarter revenue grew 9%. The company also saw revenue grow in the following divisions: Windows (6%), Online Services (9%), and Entertainment and Devices (8%). Kevin Turner, COO at Microsoft Corporation (NASDAQ:MSFT), noted that the company has a leadership position in the cloud, with greater market adoption of the company’s cloud services, such as Office 365, Windows Azure, and Dynamics CRM.

In the months ahead, investors should watch for Windows 8.1 and how it addresses concerns related to Microsoft devices’ combination of touch + mouse + keyboard interface. The software update will be made available to third-party computer manufacturers in August.

Another interesting development is the arrival of Intel’s new Haswell microchips, which could also boost demand for Microsoft’s devices. Charles King, tech analyst at Pund-IT, told USA Today the chip was made to support Windows 8 features like touch enablement, longer battery life, and voice and gesture recognition.

Google Inc (NASDAQ:GOOG) challenged by mobile ads

As desktop ad revenue begins to slow for search engines, the next moneymaking opportunity lies in mobile devices. So far, increasing revenue from mobile ads has been a struggle for Google Inc (NASDAQ:GOOG), and it missed Wall Street estimates of $11.33 billion of net revenue and EPS, minus the cost of stock options, of $10.78 per share. The company reported second quarter net revenue of $11.1 billion, up from $9.2 billion a year ago. EPS rose to $9.54 per share from $8.42 per share.

Google Inc (NASDAQ:GOOG) is currently working on “enhanced campaigns,” introduced in February, and currently mandatory for all advertisers, which bundles desktop, tablet and cellphone ads for all ad campaigns. Advertisers are given the option to opt out of cellphone ads, but are required to buy tablet ads. Google Inc (NASDAQ:GOOG) believes the new process will make it easier to reach customers who use a variety of devices. This also means that mobile ad prices will rise and should catch up to the higher prices charged for desktop ads. The financial results of Google’s attempt to prioritize mobile may take up to a year to become apparent.

Meanwhile, back at the Apple Inc. (NASDAQ:AAPL) ranch …

Investors applauded Apple Inc. (NASDAQ:AAPL)’sthird quarter results, which beat expectations. The company’s iPhone sales hit a record in June of 31.2 million units sold, while analysts predicted unit sales of 26.5 million. In contrast, the iPad had a significant drop in sales to 14.6 million versus 17 million sold in 2012, suggesting the price of the device might drop soon. Apple Inc. (NASDAQ:AAPL) also sold fewer Macs – 3.8 million units compared to 4 million in last year’s quarter. Tim Cook, Apple’s CEO, mentioned new products coming down the pipeline in the fall, around September, and into 2014. The company’s guidance for the fourth quarter is in line with market estimates — revenue between $34 billion and $37 billion and a gross margin of 36% to 37%.

My Foolish conclusion

Of the three stocks mentioned, Apple presents the best value, trading at 10 times 2014 earnings with a PEG ratio of .62. Apple’s current price is well below the high of $700 reached in September 2012, which presents an interesting buying opportunity before the company introduces new products later this year and in 2014.

Google and Microsoft shares are currently overvalued, possibly due to high expectations placed on a more profitable ad revenue system from Google and Microsoft’s devices employing an improved version of Windows and other innovative features. The effect of these initiatives may already be priced into share prices, so negative news concerning them may lead to further prices drops for Microsoft and Google shares.

Eileen Rojas has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Eileen is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article What’s Next For Microsoft and Google? originally appeared on Fool.com is written by Eileen Rojas.

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