Which stock to buy today: YHOO, MSFT or GOOG?

Which stock to buy today: YHOO, MSFT or GOOG?

Summary: The Microsoft-Yahoo deal implosion was a near certainty when the talks began. Two cultures as convinced that they are superior to one another can never coexist, so forget blaming anyone for what was inevitable.

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The Microsoft-Yahoo deal implosion was a near certainty when the talks began. Two cultures as convinced that they are superior to one another can never coexist, so forget blaming anyone for what was inevitable. At least it didn't take two years and billions of dollars in real losses, as compared to the short-term deflation of Yahoo share values after the negotiation ended.

The question today, though, is what company should you buy in light of this "change of fortune" for Microsoft, for Yahoo and, for Google, which could benefit from a Yahoo ad deal in coming weeks or months?

All three are profitable. All three had better Q1 results year-over-year than 95% or more of publicly traded companies. In Yahoo's case, the company made almost four times the profit it did a year ago, while Google's net income increased by 30 percent and Microsoft's fell by 11 percent. Each company is at a different point in its management of resources. We can clearly see that Yahoo cost-cutting has yielded positive results. Google's been slowing hiring a bit lately, which will increase margins in future quarters as it continues to enjoy ad revenue growth based on its dominant position. And Microsoft? Well, they have a great mountain of cash they will eventually use to buy a line of revenue.

But if you look at their trailing and forward Price-to-Earnings ratios, we can see that the great risk remains with Yahoo:

Trailing P/E (8:10 AM Pacific, 5/52008) Forward P/E (source Capital IQ)

Google 41.76 24.01

Microsoft 17.36 13.83

Yahoo 31.65 42.79

Yahoo has to grow revenue to break out of its current situation, whereas both Google and Microsoft merely have to continue on their current paths to remain attractive to investors. However, both Google and Microsoft have grown used to expansion as a way of life, which is not assured in the current economy. Yahoo, on the other hand, could lower costs and add new revenue by opting for a Google ad partnership, allowing the company to shed a lot of sales costs, which might bring its margins up into the 24 percent to 28 percent where Google and Microsoft operate today. Google, of course, would win in that situation, as well.

Meanwhile, it is Microsoft that has the most work to do to convert its massive capital expenditures and staffing costs into higher profits. For all its software revenues, the Redmond giant is the most moribund of the three. Microsoft needs a major innovation of its own, or to acquire one, to kickstart rapid growth. Of course, if Microsoft does put its cash to work in a productive way (something I doubt will happen, because it has become too conservative), the potential for returns are much higher than with Google (relatively over-valued based on trailing P/E) and Yahoo (over-valued today and in the future, based on trailing and future P/E).

So, if I were buying today, I think I'd put money into all three, about the same amount into Microsoft than Yahoo, and the largest share into Google, so that I was prepared to benefit from any of the next moves these companies make.

The long and short of it is: None of these companies has "lost" the game, and each has potential to become bigger than it is today. Only Microsoft stands to lose value on its income statement in the short term. And who gives a damn what the market thinks when so many people are chattering away based on prejudices and misconceptions about Microhoo today?

Topics: Banking, Enterprise Software, Google, Microsoft, Social Enterprise

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Talkback

13 comments
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  • MSFT because they're a big famous successful company

    Meanwhile, back in the real world :

    1) Google because of the ad revenue growth which will accelerate as the economy picks up again following the foreign forays

    2) Yahoo, because they have a lot of stuff in the pipeline and will be working even harder now following the MS debacle

    3) I'd sell any MS shares, because with all the time and money in the world all they can come up with is Vista. Mesh and W7 will just be unreliable vapourware/alphaware for a long time yet.
    fr0thy2
    • Agreed: Vista, Mesh and W7 isn't the innovation needed

      but I wouldn't discount MSFT because they are big, famous
      and successful-by-sheer-inertia. I'll stand by my argument
      that if one were putting money into the market today, MSFT
      would be a buy, along with the others, but probably the
      smallest purchase I'd make.
      Mitch Ratcliffe
    • Too bad your hatered blinds you to the truth

      and that pretty much says it all.
      GuidingLight
  • Hatred?

    Dude, get a life. I'm not counting Microsoft down or out.
    Being old enough to remember when IBM was "doomed by
    the PC," I don't make the kinds of judgments you're
    attributing to me.
    Mitch Ratcliffe
    • He was aiming that at me Mitch

      I view MS as never progressing anything. All they have ever cared about is making lots of noise but playing filthy just to get market share and short term monies.

      There are lots of progressive things that we'll never know about because MS poisoned all the soil, so to speak.

      As the world in general is getting more literate, NS is getting weaker. Funny thing is, they still want to keep on beating the same old drum.

      Vista was no surprise, though _slightly_ worse than expected.

      MS has a playing field ahead on which it has to _compete_, and it is very out of practice for that.

      I also believe that shareholders will ultimately look at the MS Yahoo bid and start to worry about their MS positions. Why can't the company compete? Why with all the time and money in the world could they only come up with Vista?

      MS is weak. I predict a run on them within 18 months.

      Thanks for your blog by the way. It was a great read.
      fr0thy2
      • I agree with GL's assesment

        I think you pull all the wrong conclusions becuase you begin with a totally biased view from the start.

        Not many people tend to agree with you here I've noticed, and I don't see your predictions here as any different.

        [i]MS is weak. I predict a run on them within 18 months[/i].

        That's your problem in a nutshell: You'll NEVER be able to draw the correct conclusions when it comes to MS as you don't start with all the correct informantion ("crap in, crap out").

        Until you base your statements on facts, not fiction, your predictions will never come true.
        John Zern
        • We'll see ;-)

          Their historic growth was based around 2 cash cows and they've been flat for a long time, and now they're dipping.

          You only need to understand what is going on around you, rather than believe everything Microsoft says in a press release to see the changing landscape.

          You carry believing what you want kiddo. Nobody here agrees with you except for No_Ax and Loverock.
          fr0thy2
          • LOOK EVERYONE!@*(*)!@$@((! HE MENTIONS ME!(@(@!*#(!!

            HE MENTIONS ME HE MENTIONS ME!!

            :)
            Loverock Davidson
          • Don't Agree with You.

            I don't agree with you frothy2. A couple weeks ago I gave you an lecture about presenting facts not fiction. Your assessment of Microsoft future is totally blind from the truth. So wake up out of your state of denial. Matter of fact, Microsoft can afford Yahoo and Google at the same time just from the market cap they have. I think the safe investment from these three is Microsoft. I assess that because if everyone start selling MSFT stock at once there goes alot shareholder value and the rest of market. If you notice that Microsoft is one of the companies that can drive this economy down in one day. Too many people have too much money invested in it.
            1g2j
          • Their cash cows are, well, not the cash cows they once were

            hence the Yahoo bid.

            You stay stuck in yesterday as long as you want kiddo. Even Bullmer's trying to find a way out of that one ;-)
            fr0thy2
          • This is good news?

            The Mighty Windows Defender states:

            "assess that because if everyone start selling MSFT stock at once there goes alot shareholder value and the rest of market. If you notice that Microsoft is one of the companies that can drive this economy down in one day. Too many people have too much money invested in it."

            So your assumption is that so much money is invested in MS that someone (presumably the US Government) would intervene to prevent a major decline in the value of its stock? That's been a dangerous assumption in the past and is actually an argument against investing further money in MS (the amount invested is a potentially destabilizing force in the market).

            Not like I needed another excuse to not buy MS products, but thanks for the added disincentive.
            John L. Ries
  • RE: Which stock to buy today: YHOO, MSFT or GOOG?

    Agree Microsoft is shit, I would not even put a single cent in this crap.
    ZDNET_guest666
  • RE: Which stock to buy today: YHOO, MSFT or GOOG?

    Why so nervous, take it easy chap.
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