If you read Apple vs. Microsoft: The Technology Duel, then you’ll know that Apple outperforms Microsoft in hardware and media production hands down. Apple’s product pipeline is more impressive than Microsoft’s, although Microsoft’s new toy Vista may turn a few heads, but that’s another story and another blog post. 
We’re going to investigate both Microsoft stock and Apple stock to determine which security we should hold for the long run.
Comparing Microsoft Stock (MSFT) and Apple Stock (AAPL)
When attempting to compare stocks, use software or resources that do the hard work for you. Fidelity’s stock comparison tool allows investors to compare and contrast fundamentals of up to 5 different stocks.
52-Week Chart of Apple Stock Vs. Microsoft Stock
52-Week Performance: MSFT vs. APPL
Apple Shares have gained 15% in the past 52 weeks, as investors have felt confident about iPod and iBook sales.
Microsoft shares have gained 9% in the past 52 weeks, and should continue recent momentum gains as the holiday season comes to an end. Microsoft is projecting strong sales of its newest operating platform Vista, and its video gaming console, Xbox 360.
Stock Valuation: MSFT vs. APPL
Microsoft stock is actually fairly value while Apple stock seems to be highly overvalued. When comparing P/E ratios over the last 4 quarters, Apple stock stands at around 38 times its earnings, but Microsoft only trades at 20 times its earnings. Microsoft is a much cheaper stock than Apple, according to valuation ratios, even though Microsoft shares have only gained a couple dollars in the past 2 years.
In fact, Apple’s 5 year average P/E is over 60 times its earnings, forcing investors to pay a premium to hold the stock.
The Technology industry usually exhibits higher Price over Earnings ratios than the rest of the market, yet Microsoft’s 5 year average is only 30 times its earnings. Investors can purchase Microsoft stock at a discount to its 5-year average P/E ratio, suggesting that it’s a cheap stock buy.
P/E ratios are a key indicator of stock valuation, but we’ll also use PEG and Price-to-Book ratios to search for key buying opportunities.
Both companies exhibit PEG ratios of around 2, and share nearly identical Price-to-Book ratios.
The separating factor is still P/E, making Microsoft twice as cheap in comparison to Apple Shares.
Growth: MSFT vs. APPL
Apple is creating long-lasting value for shareholders with its explosive growth margins. In the last 5 years, EPS grew 110%, compared to Microsoft’s 11% gains.
Why is Apple gaining on Microsoft so fast?
Apple seems to find growth opportunities easily, while Microsoft struggles with increasing competition and market saturation issues. Analysts rewarded Apple with its market leading innovation by projecting 5 year earnings growth of nearly 20%.
On the other hand, Microsoft earnings growth is projected at only 11%, even in the midst of a new platform release and 1-year xbox 360 console anniversary. The performance of Vista will dictate how Microsoft competes with Apple for the next 5 years as computer users choose which operating system they like the best.
Of course, growth is only a part of the pie. Healthy margins are another key indicator of stock health.
Profit Margins: MSFT vs. APPL
Microsoft maintains some of the best gross margins in the business, standing at 86% annualized. No wonder Bill Gates’ fortune eclipsed $40 billion dollars, his business grossed 86 cents of every dollar earned from revenue, an incredible feat of immense proportion.
Apple achieves 29% gross margins, which is still a solid ratio, but how on earth can Apple compete with Microsoft’s PC dominance? Microsoft keeps a lot of hands away from their profits, and efficiently maximizes earnings potential. Maybe Apple should take notes from the developers over at Microsoft.
The Winner: Microsoft (MSFT)
Microsoft exhibits strong operating margins, long standing management success, and a healthy business model. Once a growth stock, Microsoft has evolved into a solid value stock pick.
Apple needs to improve their margins and increase sales volume before investors can become serious about long-term investment prospects.
If you enjoyed this article, please subscribe to our free stock market newsletter and receive a 10-day email course on successful stock market strategies
{ 2 trackbacks }
{ 9 comments… read them below or add one }
Here are my thoughts on these two stocks.
My pick is AAPL as long as Steve Jobs is leading the company. When he is there AAPL delivers great innovations. Their challenge is to keep coming up with the next innovation before their current product becomes the norm. The IPod has just about run it’s course. AAPL needs their next big idea.
MSFT is struggling, which is why the market is making it a value stock. MSFT’s business model of operating system and office products is at siginficant risk due to GOOG. Unless MSFT reinvents itself, which Business Week seems to think they will do, MSFT may only be a shadow of itself in 10 years.
Disclosure: I own AAPL and GOOG. I own Jan 08 leaps for MSFT, in case they do reinvent themselves:-)
I agree. Steve Jobs is doing a wonderful job at leading Apple. They are a large market player in the technology industry because of his leadership.
But the iPod is reaching market saturation and increased competiton from Microsoft, Sony, JVC, and other firms that wish to profit from the next generation media player movement.
Apple is well run company, and so is Microsoft. Microsoft has billions of dollars in cold hard cash. They can create any gadget or gizmo with all that working capital or buy back shares with cash.
It’s become a value stock play, and a fairly safe one at that.
MICROSOFT IS BORING…..APPLE IS EXCITING….MICROSOFT IS PLAYING CATCH UP ON INNOVATION COMPARED WITH APPLE’S LEADERSHIP IN THIS AREA.ALL APPLE’S PRODUCTS ARE BEAUTIFUL AND EFFICIENT,WHEN IT COMES TO SERVICE APPLE IS TERRIFIC.THEY HAVE POSITIONED THEMSELVES FOR HUGE CONSUMER RESPONSE WITH THEIR APPLE STORES.
Maybe I’m nuts, but I really think Apple can take the computer market away from MSFT, particularly given that after 5 years and billions spent, the anemic Vista seems to be MSFT’s last best “shot”.
Apple only controls 3% of the worldwide PC market.
Sure, they are making wonderful gains in market share, and may increase that percentage to 4% by 2007, but Microsoft has a reputation for controlling markets in which they operate in.
Many computers users have become so familiar with Microsoft PC’s that a complete 180 reversal seems unlikely.
Apple’s niche market is very different from Microsoft’s. Their target customers are young, tech savvy 20 and 30-somethings, while all Microsoft PCs are targeted towards any computer user.
What separates Apple users from the rest is their personal attachment to their iMacs/iBooks. My roommate has a Mac, and he’s formed a very close relationship with his computer. We’ve even debated over who manufactures the best computer. He usually wins.
I’ve had some problems with my Dell, more than I probably would with an Apple, so I may switch to Macs sometime in the near future.
But for a worldwide change to take place, it would take more than a few commercials and ad campaigns to steal Microsoft’s 96% worldwide market share.
Just my 2 cents..
Are you looking for which stock is stronger or which stock is a growth stock? Apple is suitable if you are looking for growth stock. This company is projected hovering over $100/share next year.
But if you’re going to buy a strong company, go with Microsoft. This company has like billions in cash (if I’m not mistaken, their cash position is the best in the market) so unlikely to go bankrupt anytime soon.
The post is on which company has the strongest performing stock. I agree that Apple is a much better growth play than Microsoft.
Wall street now categorizes Microsoft as a value play because Microsoft is reaching market saturation issues.
I like Apple, but there’s a bit of uncertainty as to where this stock is ultimately headed.
$100 is a possibility. What does everyone think?
All this talk of Apple makes me want to take a huge dump.
The bearishness of AAPL appears to only be a temporary glitch as AAPL recovers. I like to check the sentiment trend on http://www.predictwallstreet.com/forecast.aspx?symbol=aapl (you have to make a prediction first to see the graph) and to compare it with the quote. Today, the sentiment is again in the UP or bullish zone and the price took a dip this morning but is rising again. In the past, prices were rising fast when there were multiple days of bullish sentiments. I am curious what the sentiment and price will be tomorrow.