Microsoft vs. Apple - Which Is Worth More?

 |  Includes: AAPL, MSFT
by: J. Bruun

Close your eyes and answer this question - which company is worth more, Apple (NASDAQ:AAPL) or Microsoft (NASDAQ:MSFT)?

I suspect most of us would say Microsoft without any hesitation. This is also correct but probably by a much smaller margin than you'd expect. MSFT's market cap is 219 BUSD vs AAPL 153 BUSD.

There are a lot of great things to be said about both companies. I'll try to sum it up below from my perspective:

One or two superior products with very deep market penetration and competitive 'moats' in Windows and MS Office and a number of other products with varying successes, from Xbox to Bing, with the latter not being any match to the competition.

Risk and opportunities
Especially for Windows I don't see any risks on the horizon and the opportunities are mainly in markets like India and China where the number of people working behind a PC and in a company that is so big that they can't use pirate versions has a long way to grow. On top of this is their usage of Windows at home. I don't have any strong feelings for the future of MSFT's other products other than they are a more ordinary player with a strong 'parent'. It is however tempting to think that some of that money they keep channeling into things like Bing will eventually be more successful than they currently are.

Who doesn't love the iPod, iPhone, iMac, MacBook? They seem to have it all. They are functional, the most elegant and by far the hippest. With the iPhone they seem to have made the bridge between a full-blown laptop and a mobile phone - and it even works well.

Opportunities and risks
There are obviously a lot of people who don't yet have an iWhatever who will buy one in the future and this may drive revenue in the short to medium run. Is there room for a product between the iPhone and the MacBook? I don't think so. What will be the next thing that is going to excite me? That I can operate it by talking to it? That it can read hand writing? A better camera? Remotely control my fridge? Be a credit card? I'm not a techie but I just don't really feel too many of us have the need for any of this. I frankly rarely use all the current functionalities to begin with.

Meanwhile the people at RIM (RIMM), Nokia (NYSE:NOK), Samsung (OTC:SSDIF) and Motorola (MOT) are not sleeping and will try their best to catch up. Furthermore, if I'm right with the above guess that the speed of progress in the number of functionalities in future iPhone like devices will decline, then they will catch up even faster. Anyway remember how cool the Nokia 8110 phone that 'Neo' used in 'the Matrix' was or how you just needed a BlackBerry? Being the incumbent normally isn't something that lasts when it comes to consumer electronics/phones.

A second aspect of the competitors catching up is one of competition on price with its obvious consequences.

Financial comparison
If we take a look at the numbers they come out like this (taken from Yahoo Finance):

Market cap/BUSD 219 153 1.44
Equity 40 21 1.88
Annual result 14.6 5.2 2.81
Revenue 58 32.5 1.79
Result/revenue 25% 16% 1.57
P/E 15 29.3 0.51
Dividend yield 1.8% 0% n/a
Click to enlarge

AAPL has a P/E that is twice as high. What does it take to get there? Well MSFT sells 80% more, has 57% higher result on its per USD sales but is only worth 44% more. Another way to say it - its results are almost 3 times higher but it is only worth 44% more.

While both companies have a lot of good things going for them I find that when comparing them MSFT comes out cheap and AAPL expensive though they operate in the same or similar fields. While MSFT is priced as if they may not be able to uphold their current levels of profitability AAPL is priced as if they can increase it significantly and then keep it there. I think both are wrong. I think MSFT can increase theirs moderately without much effort while AAPL will have to soon fight tooth and nail to keep and increase theirs while being at the mercy of consumers' changing wishes.

On top of this I'd like to remind you that anyone that has tried to switch from Windows to Mac will agree that this is a whole lot harder than switching from an iPhone to another phone.

Maybe I should also mention that MSFT pays a dividend of a little less than 2% a year and has further spent 9 BUSD a year in the last two years (being the lowest in the last 4) which combined is equivalent to a 6% dividend yield a year vs AAPL's 0%.

Buy MSFT and sell AAPL short. Do it for a moderate amount as AAPL is on a strong trend upwards and you want to be able to hold the position until you have achieved a satisfactory return. I'd aim for 25% or alternatively until you feel the hype over AAPL has faded.

Disclosure: I am long MSFT and short AAPL.