The Strategist

Apple vs. Microsoft: Investor’s choice


11/01/2017 - 11:32



Apple and Microsoft, the two largest technology companies, have been fighting for decades, and their shareholders received generous dividends. But which stocks are more profitable to buy now?



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Competitive advantage

The key competitive advantage of Apple is the ecosystem built by the company. IPhone is a Trojan horse in the life of a consumer. Buyers like to use the iPhone and, as a rule, this leads to the fact that sooner or later they buy one more Apple products, for example, iPad or Macbook. This effect is further enhanced by growing number of Apple services: iCloud, iTunes, AppStore, Apple Pay and Apple Music. They drag users deep into the company's ecosystem. Therefore, if a person becomes an Apple client, he usually stays with them for a long time.

On the other hand, Microsoft recently discovered that its key competitive advantage has largely remained in the past. The popularity of Windows was the main factor that led Microsoft to a dominant position in the market in the 1990s. For many years, the operating system for personal computers was the core of Microsoft's competitive strategy. Nevertheless, Apple managed to bypass the competitor, attacking it in the market where it was weaker - namely, in the mobile operating system market. Apple realized that it cannot directly fight Microsoft on the desktop software market, where it dominated. And so it came from the flank, focusing on the development of the mobile operating system.

By the time Microsoft tried to counter-attack by creating a mobile Windows OS, it was too late. Moreover, Apple's victory in the mobile market allowed it to launch an offensive already on the desktop OS market. In recent years, Mac has constantly increased market share for account of Windows computers. Although these two technical giants compete in several other areas, Apple's success in the mobile OS market has allowed it to break away from its competitor.

Advantage: Apple.

Financial stability

Both Apple and Microsoft are powerful corporations, but still there are some key indicators worth exploring to understand how sustainable these companies are in terms of finance.

Financial performance of Apple and Microsoft are staggering. These technological giants are simply colossal machines that generate money. However, whatever impressed Microsoft's financial performance is, Apple's profitability and stability are simply unmatched.

Advantage: Apple.

Growth

In the past five years, Apple's revenue growth has outpaced Microsoft's revenue growth by about 10%, while Microsoft's earnings per share rose faster than its rival with comparable margins.

Wall Street analysts believe that over the next five years, earnings per share of both companies will grow at a similar pace: 12.37% for Apple and 11.45% for Microsoft. The difference is too smal to give advantage to any of the companies.

Advantage: No.

Evaluation

It’s wrong to talk about the benefits of buying a particular stock, not taking into account the assessment. Therefore, consider some key performance indicators of Apple and Microsoft, including the ratio of the stock price to revenue, profit and free cash flow. For all four indicators, Apple shares are much cheaper than Microsoft, which makes them a more profitable purchase.

Advantage: Apple.

source: fool.com