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Microsoft Versus Apple

|Includes: AAPL, Microsoft Corporation (MSFT)

The attractiveness of Apple's current numbers, the fact that they have no debt, and lots of cash may make apple look like a pretty good investment-to many individuals and institutional investors. It also seems like everyone wants either an ipod touch, iphone, ipad, or mac computer.  Not to mention itunes and the app store. Apple currently sells for $188 billion has earned roughly 20% on equity for the previous 5 years and has a P/E of 20x. Moreover, the accounting understates earnings by a significant amount.   

Do I dare suggest that Microsoft is currently a better buy than Apple? That is exactly what I'm suggesting. At the current price Apple is simply just not that attractive, especially when compared to Microsoft.  

Uncertainty is a big factor for both Microsoft and Apple.  But which is likely to have a better fate in 5 or 10 years from now.  As it stands Apple seems to putting out the hot products and any mention of Microsoft is generally a complaint about Windows.  

 

Let's focus on Apple.  

Let's assume that apple plugs along for 5 years providing a mirror image performance similar to what they showed over the previous 5 years beginning today. Is it fair to say that apple's reasonable market value will be proportionally higher in five years?

 

We just don't know. Apple has several huge businesses in separate markets chomping at their heels waiting for a slip-up, not to mention the guy's operating out of their garage, so if apple does not stay ahead in terms of the next cool gadget, then in 5 years, they will certainly not be in the same place that they are today in terms of economics.  Though economics are certainly the primary driver of value (and therefore also price) over the longer term, markets often react to short term perceptions.  Should Apple's perceived prospects be anything but stellar 5 years from now the price is almost certain to be proportionally lower in the future.  Don't let our current perceptions of relative prospects cloud rational thought. By rational thought in this sense, I mean overweighing what we think we know, but don't.

Though the same could be said of Microsoft.  However, Microsoft is still by far a much better business and sells for a much more attractive price.  

Key Points:
Apple has not paid a dividend in over 10 years, and net have issued significant amounts of stock-which dilutes owners.  Every dime has been put back into the business.

Microsoft on the other hand, does not need the additional capital, which is why they have returned annual income to shareholders in each of the last five years, without the typical consequences that other businesses experience.    

If you are forced to buy into this industry, I am of the impression that it makes little sense to buy Apple since Microsoft is currently a much more attractive purchase. Even if you love apple's prospects, you will likely end up agreeing with me if you do the math. 

p.s. I'm an advocate for apple products and I have both a mac and an iphone.  


 

Apple Vs Microsoft 


Apple February 19, 2010

 Thomson Banker One



 Source: Thomson Banker One 

 Microsoft February 19, 2010Thomson Banker One
Source: Thomson Banker One



Market Cap: February 22, 2010

AAPL    $188 billion

MSFT   $252 billion

 P/E:

AAPL    20x

MSFT   15x

 ROE:

AAPL    20%

MSFT   37%

 

Disclosure: I am not a stockholder of either Apple or Microsoft.