Microsoft Corporation (MSFT) or Google Inc (GOOG)? Who’s Better?

In a recent stock-talk program by CNBC, the analysts asked which company is better: Microsoft Corporation (NASDAQ:MSFT) Microsoft Corporation (NASDAQ:MSFT) or Google Inc (NASDAQ:GOOG) Google Inc (NASDAQ:GOOG)? The analysts referred to the recent better-than-anticipated quarterly reports of Microsoft that led shares of the company to rally. On the other hand, the market didn’t react well to the first quarter financial reports of Google. In order to answer the above question I would like to examine the potential growth of each company. The potential growth is likely to determine (among other factors) the direction of these companies.

Microsoft Corporation (NASDAQ:MSFT)

When it comes to growth we need to break down into the key segments that these two companies are competing: smartphones and tablets, search engines, and advertising. These three sectors are likely to be the main focus in a head to head comparison.

In this section the two companies are falling much behind other leading companies, including Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (KRX:005930).

Google Inc (NASDAQ:GOOG) is still very small in the hardware business with its Nexus brand. The company’s latest collaboration with LG doesn’t seem to augment LG’s market share, as it slipped to 6.8% as of February 2013. Despite the small market share, Google’s revenues from hardware products, which include the Nexus products, grew in the past quarter by almost 150% to reach $1,049 million. This division still accounts for a small fraction of the company’s revenues (7%), but if it will continue to grow at this pace, it will keep Google’s growth high.

Nokia has seen a sharp rise in the demand for its Lumia, which uses Windows 8. Alas it isn’t in the top five smartphone sales leaders. In regards to tablets, Microsoft’s new Surface tablet might expand the company’s market share in this sector. It’s still unclear how it will catch on in the market considering that Microsoft Corporation (NASDAQ:MSFT), much like Google Inc (NASDAQ:GOOG), is late in the game of both smartphones and tablets; so gaining a significant market share in these two markets, which already have two strong dominating companies, is unlikely. Therefore, most of the growth (and profits) of both companies are likely to come from their other segments, including search engines and advertising.

It’s still clear that Google leads the way in the U.S in terms of advertising market share with nearly 67%. According to one report, Microsoft’s sites slightly rose last month to reach 16.9%, and Yahoo! Inc. (NASDAQ:YHOO)! also showed a moderate growth to reach, as of March 2013, a market share of 11.8%. But the dominance of Google Inc (NASDAQ:GOOG) could be broken if Microsoft Corporation (NASDAQ:MSFT) will start to expand its base in the browsers, smartphones and tablets platforms with its new Windows 8.

The company’s Window’s division expanded in the past quarter by 16% (y-o-y); this division accounts for 45% of its revenues. Moreover, this division and the Business division are the most profitable divisions of the company with above 60% operating profitability. So this company’s profits and growth mainly come from its core business.

The online division of Microsoft Corporation (NASDAQ:MSFT) grew by 18% in the past quarter; the advertising revenues grew by more than 22%. But this division is still losing money.

The company’s growth in online services might slow down as its browser keeps losing market share: as of March 2013, Microsoft’s Internet Explorer’s market share fell to 13%. In March 2012, its market share was nearly 19%. On the other hand, Google’s Chrome continues to rise as it reached a market share of 51.7% in March 2013, compared with 37.3% in March 2012. The browser determines the search engine used, and if Microsoft Corporation (NASDAQ:MSFT) will continue to lose market share in the browser market its revenues from online services will slow down, while Google’s revenues will continue to rise.