Apple Stock vs. Microsoft Stock: Fundamental Analysis

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 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.

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