Why Apple Is a Better Buy Than Microsoft

One of the coolest things about Fooldom is that we're all encouraged to arrive at independent conclusions when it comes to analyzing stocks.

We're investors writing for investors, after all -- not lemmings.

As someone who has taken his shots at Microsoft (Nasdaq: MSFT  ) over the years and doesn't take offense to being called an Apple (Nasdaq: AAPL  ) fanboy, I approached Chris Baines' article detailing why Microsoft is a better investment than Apple with the same kind of bipartisan appreciation that I always do.

I enjoy reading about opinions that run counter to mine. I respect differing opinions, even if I ultimately don't agree with them. In fact, I'd rather be shaking my head than nodding along when I read any financial article. I prefer reckoning over validation.

Born to run
My fellow Fool believes that Microsoft is the better buy because it watches over a pair of virtual monopolies. It doesn't have to try as hard as Apple, where the pressure is on to perpetually innovate.

I can see where Chris is coming from. Apple is Lady Gaga, reinventing itself after every hit single. Microsoft is Bruce Springsteen, still selling out concert halls as a result of a couple of hits released more than 20 years ago.

See what I did there? I made Mr. Softy sympathetic to you, assuming that you're a bigger fan of The Boss than of today's hottest pop star. In reality, Microsoft is more of a two-hit wonder along the lines of The Knack, the Greg Kihn Band, or Men Without Hats.

See what I did there? I just pulled the rug out from under you.

Putting the "no" in innovation
Chris considers Apple a serial innovator, forced to raise the bar every time out. I don't exactly see it that way, but at least the class of Cupertino can find new ways to hit it out when it wants to. Microsoft couldn't innovate its way out of a corn maze with a weed whacker.

Microsoft tried to one-up Apple's iPod and it resulted in the Zune snooze. Bing turned a few heads during last year's launch, but Microsoft remains the only tech giant that's currently losing money in its online operations.

Yes, the Xbox 360 is a hit -- but it took years to get there, and margins there will always be a far cry from Microsoft's software stronghold.

I won't apologize, because Apple is just flat out better at Microsoft when it comes time to raise the bar. The real mistake here is assuming that Microsoft can just coast along without doing the same.

The world is changing
Operating systems and productivity suites may seem like virtual monopolies, but the climate is changing quickly.

Tablet sales are eating into the laptop space. Smartphone usage is the new portable computing. Microsoft's a distant player in both of these realms.

Even Microsoft partners are learning new languages. Dell (Nasdaq: DELL  ) and Hewlett-Packard (NYSE: HPQ  ) have embraced Google's (Nasdaq: GOOG  ) Android collective, and HP shelled out $1.2 billion for Palm to have its own proprietary operating system. Why pay for Windows when any hardware maker can go with the open Android for free?

Have you seen Microsoft's latest ads about going "to the cloud" for editing a family portrait, streaming video during a flight delay, or collaborating on presentation documents? What Microsoft doesn't want to tell you is that "to the cloud" is a euphemism for "away from Microsoft."

Free Web-based photo editors have been around for years. Google Docs and Oracle's (Nasdaq: ORCL  ) Sun have been offering free productivity suites with virtual collaboration on the cloud for ages. And as for streaming video, does Microsoft really want to go there?

Three years ago, you needed a computer running Windows to stream from Netflix's (Nasdaq: NFLX  ) digital library. These days, that's probably the last device that the 11 million of Netflix's 16.9 million subscribers who do stream would think of using. They're using tablets, Blu-ray players, and iPhones.

Sure, Netflix CEO Reed Hastings is on Microsoft's board of directors, but he had no problem being a surprise presenter this year during Apple's iPhone 4 debut, sharing the stage with Steve Jobs in explaining that Netflix would be streaming on the new handset.

The safer bet is the smarter wager
Microsoft isn't as relevant as it was five years ago. Its stock price is essentially where it was 10 years ago. How confident are you as to where a fading Microsoft will be in five or 10 years?

Apple, on the other hand, has been ascending in that time. If innovation is the price that one has to pay to get folks to pay a premium for their products -- a position that Microsoft now finds itself in as it floats away in a sea of free alternatives that are growing in popularity -- I'll stick with the safer bet in Apple.

Ten years ago, Microsoft had the heftier cash balance. Not today. Ten years ago, Microsoft had the prettier stock chart. Not today. Microsoft is the one cranking out a dividend, but I'm sure every rational Microsoft investor would swap out that measly yield for the capital appreciation at Apple.

Yes, Apple trades at a richer multiple of 17 times this fiscal year's projected earnings, but that's a steep discount to its projected top- and bottom-line growth.

Owning Microsoft, on the other hand, is a race against time -- Father Time. 

Many of Rick's fellow Fools and newsletter analysts disagree with his bearish stance on Microsoft. Where do you stand? Share your tips in the comments box below. And for more Foolish coverage on Microsoft, add the stock to My Watchlist.


Read/Post Comments (11) | Recommend This Article (18)

Comments from our Foolish Readers

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 December 12, 2010, at 10:49 AM, topsecret10 wrote:

    Risk/Reward Is just not there with Apple. 100 shares for 30 grand ? I don't think so ! I have much better ways to Invest that kind of money... TS

  • Report this Comment On December 12, 2010, at 10:51 AM, topsecret10 wrote:

    Oh,by the way... I would NEVER buy microsoft... That story has been told.... time to look for the the next "microsoft"... TS

  • Report this Comment On December 12, 2010, at 11:07 AM, hembreeder wrote:

    TS: It's not the total amount of shares, but the total amount of money you invest that counts. You can put $5,000 in Apple if you like, and $5,000 in Microsoft. You'll make more money on the one that goes up a higher percentange. Cost per share is meaningless. Didn't your momma teach you anything?

  • Report this Comment On December 12, 2010, at 11:54 AM, topsecret10 wrote:

    hembreeder Why would ANYONE want to buy 17 shares of Apple for 5,000 bucks ? If thats your cup of tea "good luck"... you'll need It.... I can think of far more imaginative ways to park 5000 dollars for the long term.... just an example.... 300 shares of (PNNT) @ 12.65 with a dividend of just under 9 % 300 shares of (XRIT) @ 4.50 Also, keep your comments that only someone with a limited I.Q would say to one who's opinion Is different than theirs.... Hope you don't end up In a soup line... TS

  • Report this Comment On December 12, 2010, at 12:00 PM, techy46 wrote:

    Sold 1000 shares of Apple at $317 (30 days ago); bought equal $$$ of Intel 7100s @ 21 and Microsoft 5600s @ 26.70; so far 155561 + 153104 = 308665 +18318 (cash pocketed) = 326,983. So far I'm 10k ahead. Plan on holding and selling half into earnings and waiting until end of Q1 to see what to do with other half.

    Basically, Apple (x10) is 32/s anf Intel 2, MS 27. Both INTC and MSFT have better PE and pay 3% dividends so 300K gets $2250/q. I see more % upside to INTC and MS than AAPL. Time will tell.

  • Report this Comment On December 12, 2010, at 12:13 PM, techy46 wrote:

    @hembreeder - Your totally correct. You have to divide Apple by 10 to account for # shares therefore it's 32.05/s, earnings 1.51, Forward PE 14.5. INTC 21.91/s, earnings 1.86, F PE 11.24, MSFT 27.34, earnings 2.33, F PE 10.16 with latter two paying 2-3% dividends. Also, I'm a tech investor not a consumer electrnics investor. Should've bought HTC and Samsung though.

  • Report this Comment On December 12, 2010, at 12:55 PM, bertobob wrote:

    Bless you for remembering the Greg Kihn Band.

  • Report this Comment On December 12, 2010, at 1:43 PM, TMFRhino wrote:

    bretobob,

    HA! That one made me crack up too.

    -Eric

  • Report this Comment On December 12, 2010, at 2:31 PM, MegaEurope wrote:

    Rick wrote: "I'm sure every rational Microsoft investor would swap out that measly yield for the capital appreciation at Apple."

    What does this sentence mean? Every Microsoft shareholder secretly wants to own Apple instead? (Seems unlikely considering they can buy and sell as they please.) Apple stock has performed better over the last 10 years? (Duh, but there is limited relevance to future returns.)

  • Report this Comment On December 12, 2010, at 7:47 PM, helenclarke7 wrote:

    Rick -

    Bruce Springsteen had way more than 2 hits. I go to every Bruce concert I can and own Apple not Microsoft. Bruce and Steve Jobs are geniuses at what they do.

    Helen

  • Report this Comment On December 13, 2010, at 6:37 AM, cbaines2 wrote:

    Rick...

    Thanks for reading my piece and taking the time to respond. (I rec'd this.) I like the Springsteen analogy.

    And I can see why you started the Dueling Fool feature....

    On Guard!

    This may come as surprise, but I agree with much of what you say.

    I agree that Microsoft is terrible at innovating.

    I agree that Apple is awesome at innovating.

    I agree that Apple's valuation is okay.

    I agree that Apple was a better investment in 2000 than Microsoft.

    However,

    I don't agree that the more innovative company is the better investment. Tobacco companies, especially Altria, have beaten tech companies over the past 50 years despite being terribly unpopular.

    I don't agree that the cloud will kill Microsoft. You still need an OS, and as tobacco companies go to show an industry in decline can still generate Foolish returns when you're the dominant player.

    I don't agree with your assumption that Apple is immune to the cloud. If the cloud is going to destroy Microsoft, why won't it kill Apple too?

    But mostly I don't agree with Microsoft's past stock performance being used against it.

    The reason why MSFT performed so terribly the past ten years is because investors overpaid back in 2000. (This was actually discussed, ironically, in the latest Motley Fool Independence Fund letter.) Microsoft traded around 80 or 60 times earnings back then.

    What happened is that the earnings grew but the PE contracted, canceling each other out in a flat stock price.

    From 2001 to 2010 Microsoft's EPS increased at more than 13% per year. Pretty darn good. Yet the stock went nowhere since investors priced in all this growth and then some back in 2001.

    But the stock now trades at less than 10x forward earnings. A much better starting point than 60x earnings in 2001.

    What Microsoft's performance over the past 10 years goes to show is not that Microsoft sucks, but rather that investors should beware of overpaying for popular stocks, even very good ones.

    Thanks,

    Chris Baines

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