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Apple Inc. (AAPL), Google Inc (GOOG) or Microsoft Corporation (MSFT)? The Smartest Investment

When it comes to operating systems, three companies largely control the market. Outside of the few Linux devotees, the majority of people on a traditional PC or mobile device are dependent on either Apple Inc.
(NASDAQ:AAPL), Google Inc (NASDAQ:GOOG) or Microsoft Corporation (NASDAQ:MSFT) for their operating system needs.

But of these three companies, which is the best investment?

Apple Inc. (NASDAQ:AAPL)

Apple created the mobile space

First in 2007 with the iPhone, then again in 2010 with the iPad, Apple Inc. (NASDAQ:AAPL) literally created the concept of the what is now commonly called a mobile device. Riding that wave of innovation, Apple shares surged, and the company became the largest in the world.

But unlike the iPod — which faced no significant competition — Apple has attracted dozens of competitors to its mobile devices. And while the Cupertino tech giant had been able to, for at least five years, surpass these competitors in terms of quality, things are changing rapidly.

As I wrote previously, there are perhaps a half dozen smartphones on the market now that are as good or better than Apple Inc. (NASDAQ:AAPL)’s flagship iPhone 5. This stands in stark contrast to just a year ago, when the iPhone 4S was hands down the best phone on the market.

Meanwhile, the competition for tablets has finally materialized, with a wave of Windows and Android-powered tablets set to hit the market in the coming months. Apple’s fundamental problem is the same as the one it faced in the 1980s — competitors coming in, stealing its ideas, and offering cheaper and better products.

However, Apple Inc. (NASDAQ:AAPL) shares offer the most value of the three operating system companies, at least in terms of financial metrics. As of Thursday’s close, Apple was trading with a price-to-earnings ratio below nine. Contrast that with Microsoft’s 16 or Google’s 24.

In addition, the company has a cash pile of $140 billion — so large, that stories discussing what Apple could do with this money have become cliched. It seems obvious that the company will have to return this capital to shareholders at some point, and yet, Apple Inc. (NASDAQ:AAPL) has given little indication of its plans for the cash.

Google has surpassed Apple in mobile while dabbling in traditional PCs

Google Inc (NASDAQ:GOOG)’s Android was unveiled just shortly after the iPhone, but it took quite a while to catch on. In 2011, Android finally captured a majority of the mobile handset market, and just last month, it surpassed Apple’s iOS in terms of web traffic.

Android’s rate of improvement has far surpassed that of iOS. While early versions of Android were sluggish and buggy, recent versions have become every bit as smooth as iOS while being significantly more stable than earlier versions. This had led to a plethora of Android phones every bit as good as Apple Inc. (NASDAQ:AAPL)’s.

Android has easily captured emerging markets, as Google opts to give away the operating system for free. And while critics have faulted the company for this practice, most are missing out on the company’s larger strategic aim.

Google Inc (NASDAQ:GOOG) has become an operating system company in recent years, but fundamentally, it remains an Internet services company. This is embodied in its radical PC operating system Chrome OS, which isn’t so much an operating system as it is just a mobile browser.

Chromebooks are generally cheaper than even the cheapest Windows machines, but remain entirely reliant on Google Inc (NASDAQ:GOOG)’s web services to function. As technology evolves, and Internet speeds increase, services will become increasingly more important.

In an interview with Andy Caddy, Microsoft Corporation (NASDAQ:MSFT)’s CEO Steve Ballmer speculated about the future:

“While our core skill will remain software, I think of us as a devices and services company…10 years from now, are you going to buy software or mostly going to be buying services from us?…I think the answer is services.”

If any company is well positioned to win in services, it’s Google, at least from a consumer side. With gmail, Google Docs, Google search, Google+ and many other services, the company leads the pack.

Microsoft remains in control of traditional PCs, but is struggling in mobile

As an investment, Microsoft Corporation (NASDAQ:MSFT) is a bit of an enigma. While its flagship product, Windows, seems to be staring down the possibility of obsolescence, the company is well diversified through a multitude of other products.

Microsoft Corporation (NASDAQ:MSFT)’s Office remains an indispensable tool for the majority of white collar workers. Its lineup of video game consoles have become widely popular, and the next Xbox could double as a full entertainment hub, replacing the need for a smart TV.

As the Ballmer quote demonstrates, the company has been working on branching out into services, including its Bing search engine, Sky Drive, and a redesigned email system.

Since instituting its dividend, Microsoft Corporation (NASDAQ:MSFT)’s stock has traded in a tight range, mostly for the last decade. It seems likely that the trend could continue, as its dying businesses are replaced with new initiatives.

Google’s future looks the brightest, but you’ll have to pay for it

Ultimately, Google Inc (NASDAQ:GOOG) appears to have the brightest future of the three companies, but the stock isn’t cheap. Trading around $786, it isn’t that far removed from its all-time high. Both its PE ratio and forward PE ratio are higher than its competitors.

But Android has been steadily eating away at iOS’ market share, and as more devices hit the market, this trend seems likely to continue. That should mean more users for Google Inc (NASDAQ:GOOG)’s web services, and with more users comes more ad revenue.

Microsoft Corporation (NASDAQ:MSFT) is in the middle. Office is essentially a monopoly product, while its initiatives in services should offset a declining Windows.

As for Apple, despite being the darling of the tech world just a few months ago, the company is facing serious issues. Nearly all of Apple’s profit, and all of its growth, comes from the iPhone and iPad. Android-powered devices appear poised to do to these devices what Windows did the Macintosh in the late 1980s — push them into permanent minority status.

To be fair, Apple is trading at a bargain-bin valuation and has a mountain of cash. If the company’s management opts to return capital to shareholders, things could turn around quickly.

The article Apple, Google and Microsoft: Which is the Best Investment Right Now? originally appeared on Fool.com is written by Salvatore “Sam” Mattera.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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