Can IBM, Microsoft, Google Stand Against Apple Long-Term?

Joel Anderson  |

The entire investing world is abuzz with talk of Apple (AAPL). The Cupertino, CA-based company, founded by the late Steve Jobs, has powered its way into the consciousness of the world by becoming the most valuable company on the globe and outpacing the market capitalization of Exxon Mobil (XOM), the second most valuable company in the world, by over $150 billion. Now, with cash reserves of $100 billion, a new iPad that sold over 3 million units in its first weekend of release, an iPhone 5 reportedly on the way, and a new dividend making the stock even more attractive, Apple has become a juggernaut of epic proportions that appears to show no signs of stopping.

But what does this mean to investors looking for a blue chip tech stock to hold over the next decade or two? When looking at the top 10 companies in the world in terms of market cap, four of those companies are in the tech sector. But the identity of these four companies paints an interesting picture of that sector on the whole. On the one hand, there's the new blood. Apple leads every company in the world while Google (GOOG) rounds out the top 10 with a market cap of just over $200 billion. However, the other two very much represent the Old Guard, with IBM (IBM) at $237.17 billion and Microsoft (MSFT) at $267.75 billion. The future for the sector is, as always, murky. This is true in any market but especially so in tech, where innovation and shifting market trends are the nature of the business.

But no matter how murky, the billion dollar question remains: wherein lies the future of this industry? All four companies are vying for different segments, and yet, criss-crossing markets, creating a sort of venn diagram of competition. Google is competing with Microsoft's Bing for search engine users. Apple competes with Microsoft over users for its OS platform versus Microsoft's Windows. Google competes with Apple over the smart phone market and the new internet television systems both have trotted out. Microsoft and IBM have long been rivals in the software market. And for the investor, each of these four companies are no doubt vying for attention when considering investing in blue-chip tech firms.

A Post PC World?

One emphasis for Tim Cook during the presentation that included the unveiling of the iPad 3 (though, don't tell him we called it that) was the idea of a post-PC marketplace. And for Apple, this is clearly a point that is crucially important to continued growth. The enormity of Apple's success makes it easy to forget just how little time it took to rise there. It wasn't that long ago that Microsoft and windows had appeared to almost completely eclipse Apple in the PC market, with Apple appearing to be headed towards a destiny as a niche computer maker for the high-end market.

That all changed with the introduction of "post-PC" products like the iPod, the iPhone, and the iPad. These fueled a meteoric rise for the company, driving massive profits and pushing the company's stock up to its current lofty heights. But the iPod is barely a decade old, having first been introduced on October 23, 2001. The iPhone? Summer of 2007. The iPad? It's only approaching the second anniversary of its launch.

Apple is up over 600 percent since the release of the iPhone, but its profits are being driven by dominating markets that it created and that have only existed for a brief period of time. These markets remain so young that accurately predicting future trends remains largely impossible to do with much confidence. If Apple can rise this fast in only five years on innovative new products, is it really that ridiculous to believe that an equally rapid fall could also be in its future? The question becomes even more prescient when one considers that Apple exists in a marketplace that, historically, can be very fickle.

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Apple, at this point, could be seen as selling designer luxury goods to a relatively small portion of the population. Will there be people lined up around the block for the new iPad or iPhone every year for the next decade? How is one supposed to project these trends 10 years down the road when the market for these goods didn't even exist five years ago?

Google presents a similar question. While Apple may have redefined itself as a company only recently, Google has only been incorporated as a company about three years longer than the iPod has existed, and this August will only mark the eighth anniversary of its IPO. Once again, it makes predictions about the future of the company and its place in the tech sector a fairly futile exercise (that is, if doing it accurately weren't worth so much money to investors everywhere). Google is a company that derives over 96 percent of its revenue from online advertising, but it's actively looking to branch out into a variety of other areas. Through a series of acquisitions, Google has consolidated its domination of internet searches while rolling out competitors to Apple's iPhone and Facebook (FB).

Google's rise from quirky search engine with a future to one of the most valuable companies in the world happened remarkably fast, and the company still appears to be in the process of redefining itself. But can a rise as fast as going from being unincorporated 14 years ago to being one of the ten most valuable companies in the world really be considered stable?

The Old Guard

On the other side of the coin are the older firms. Microsoft is about the same age as Apple, but its role in the market has been carved out and clearly defined for much longer. IBM, by contrast, is downright ancient. The company was founded in 1911 and its been in the computer business long as there have been computers. However, while Microsoft and IBM certainly lack the potential for explosive growth that Google or Apple have displayed, they do seem to rest on foundations that are much easier to define. The markets for computing and software that these two companies fill aren't like the market for tablets, which is still defining itself. Businesses have come to rely on the products offered by these companies, and Microsoft and IBM provide them at affordable prices that can almost ensure that future generations of offices will be coming back for more.

As such, investors may be tempted, when considering a long-term investment, to look to these old guard companies for investments. IBM, for one, has the Warren Buffett seal of approval. In last year's third quarter, the Oracle of Omaha bought $10.7 billion in stock, representing a 5.4 percent stake in the company and making a rare foray into the tech sector. In explaining his reasoning, Buffett spoke to the virtues of IBM's ability to offer a solid, reliable product in an area with steady demand, recounting a story of how a purchasing agent once told him "Nobody ever got fired [by] buying from IBM."

So, why would an investor go against Warren Buffett? Sure, if one had had the foresight to buy into Apple 10 years ago it would be fine and dandy but where can it go from here? Even if Apple is destined for bigger things, IBM and Microsoft are basically risk free, right? Well, that, once again, isn't entirely certain. While it's tempting to think that Microsoft and IBM are the sensible, reliable alternative to Google and Apple, offering a lower ceiling but relying less on markets where demand is still in a state of flux, the tech sector is one where innovation can't be underestimated.

The lessons of Kodak, which recently filed for bankruptcy, should most likely not be ignored. Kodak failed to innovate, letting its digital camera technology go to focus on selling film, and watched its market subsequently disappear in a mater of decades. If Tim Cook and Apple's vision of a post PC world are to be believed, it's entirely possible that companies like Google and Apple are actually riding a wave that's going to sweep away the old guard and usher in an entirely new era of computing.

And the winner is...

Unfortunately, this sort of debate is one that can only be seen clearly in the review mirror. What, exactly, the market for smart phones and tablets will look like ten years from now is not something the average investor can confidently predict. Nor is the stability of Microsoft and IBM's business models in a world that's rapidly shifting the way it computes. In the end, deciding on which blue chip tech firm to invest in simply isn't a question that's going to have easy answers.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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