Buy Apple, Sell Microsoft

We all saw the passing ships last week. A buoyant Apple (Nasdaq: AAPL  ) overtook a diminishing Microsoft (Nasdaq: MSFT  ) to become the country's second-most-valuable company in terms of market cap.

Mr. Market isn't a color analyst, prone to flashy dissections of leaders and bleeders jockeying for position. If anything, most of the comments that I've heard over the past week have been sympathetic for Microsoft's plight, and troubled by Apple's spectacular ascent over the past few years.

Microsoft is now the value stock, biding its time until its fundamentals shine again. Apple is the speedy growth stock, destined to get tripped up or catch a breather.

Hogwash!

The only sensible thing to do right now is load up on Apple and dump Microsoft. Heresy? Blasphemy? Truth.

Apple is cheap
Shares of the Cupertino cult leader have more than tripled since bottoming out 17 months ago. The stock is nearly a 20-bagger over the past six years. Equities that rack up significant gains often carry bloated valuations, but that's just not the case with Apple. It's more than earned its upticks, as its attractive earnings-based multiples attest.

Apple is fetching less than 20 times this fiscal year's projected profitability, based on last night's close. The company's trading at a reasonable 17 times next year's bottom-line estimate.

Oh, and keep in mind that Wall Street's expectations are a moving target. Apple has consistently smashed through analyst models, forcing the pros to revise their numbers higher. Over the past three months alone, Apple's profit target has gone from $11.62 a share to $13.34 a share.

There are certainly cheaper blue-chip technology stocks out there, but you get what you overpay for when you deal with tech wrecks. Apple is the real deal, as one simple exercise will reveal.

Close your eyes. Imagine where Apple will be in three years. Will there be more iPhones out there? There should be. Even before considering an international push, the inevitable end of AT&T's (NYSE: T  ) exclusivity will make this a game changer for Verizon and any other carrier fortunate enough to market the smartphone that everyone secretly craves. In the meantime, iPhone revenue still soared 124% in its latest quarter.

After selling 2 million iPads in less than two months, the future seems bright for Apple's latest drool-worthy gadget.

iPod unit sales suffered a 1% year-over-year decline in Apple's latest quarter, but the average price per unit rose sharply, pushing revenue growth into the double digits. Besides, since higher-priced iPhones and iPads double as iPods, this is still technically an expanding market.

Then we get to Apple's roots in computing. You're not hearing a lot about Macs and MacBooks, but Apple sold 33% more computers during its latest quarter than it did a year ago.

Whether Apple's innovative products carve out new markets or cannibalize existing ones, the company has found itself during Wall Street's lost decade. You'll be surrounded by more iPhones, iPads, and Macs in three years -- I can practically guarantee it.

Microsoft is expensive
On the surface, the world's leading software company appears cheap. It's trading for just 13 times this fiscal year's profit target and 11 times next year's estimate. Its latest quarter was a dud compared to Apple, but at least it mustered gains on the top and bottom lines.

However, Microsoft's 6% revenue gain is an insult to Apple's 49% surge. The Windows 7 rollout padded Mr. Softy's report, whereas computer users were skirting Dead Vista Walking a year ago. Back out Microsoft's operating software division, and revenue actually fell for the period.

Let's go through Microsoft's subsidiaries by closing our eyes and leaping forward to 2013.

Does anyone honestly believe that Microsoft will have a bigger share of the computer or mobile operating system market in a few years? Even Microsoft's allies are cozying up to its enemies. Dell's (Nasdaq: DELL  ) upcoming Streak tablet leans on Google's (Nasdaq: GOOG  ) open Android platform. Hewlett-Packard (NYSE: HPQ  ) recently scrapped its Windows-powered Slate launch, presumably to go with Palm's (Nasdaq: PALM  ) webOS. HP wouldn't buy Palm if it didn't intend to capitalize on webOS for smartphones, tablets, netbooks, and eventually heartier computers.

Office 2010 has finally arrived, but here, too, Microsoft's onetime fortress is now under siege by Google Docs and other low-priced cloud-based solutions. The company has sturdier footing on the server software front, but it remains doomed to a future where it will command smaller chunks of the markets it dominated -- and at lower price points.

Microsoft has the Xbox, but video-game hardware and software sales have been plummeting over the past year and change. There are just too many diversions vying for attention and disposable income these days.  

So where's the long-term growth? Analysts may feel that Microsoft will take baby steps forward as we claw our way out of the recession, but it's hard to get excited about the software behemoth's growth prospects beyond that.

In three years, I see a smaller Microsoft and a more relevant Apple. If market valuations follow the fundamentals, I know where I want to be.

Microsoft is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor choice. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz really does find himself surrounded by more and more Apple appliances these days, but he does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (12)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 02, 2010, at 1:48 PM, gslusher wrote:

    "Besides, since higher-priced iPhones and iPads double as iPods, this is still technically an expanding market."

    Hallelujah! Someone finally recognized that. Jobs has been pointing it out for a long time, but most "analysts" and "bloggers" seem to forget it. Lots of people buy an iPhone instead of a phone AND an iPod.

  • Report this Comment On June 02, 2010, at 2:39 PM, lawman508 wrote:

    I remember the early '80s, when Apple's products blew away Microsoft's. Then, slowly, Microsoft simply replicated all of Apple's ideas - but at the same time, allowed other partners to profit by allowing them to build their own platforms.

    This will happen again over the next 10 years as Microsoft replicates Apple engineering

  • Report this Comment On June 02, 2010, at 4:42 PM, TMFBreakerRick wrote:

    lawman508, the only problem in that scenario is that it's Google -- through the open Android -- that would be filling in for Microsoft's role this time around.

  • Report this Comment On June 03, 2010, at 3:49 PM, wdstromer wrote:

    There is no doubt Apple has good products and a (more than) cult following but I have to note the clear arrogance of Steve "Willy Wonka" Jobs and his diatribe against Adobe Flash. It is clear that Apple wants to maintain as large a moat as possible against (gasp!) a 3rd party running games & apps other than Apple on their iPod/iPhone/iPad. Whether this will negatively affect Apples business is anyone's guess. If Flash is so bad then let users and the market decide.

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