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Is Microsoft a Best Buy While Apple Is Not?

Longtime sparring buddies Microsoft (Nasdaq: MSFT  ) and Apple (Nasdaq: AAPL  ) have been at it for years. The last decade has most assuredly been far kinder to the Mac maker than the Redmond giant.

Well, a relatively small research shop, Arete Research, is starting to change its stance on the two dueling titans. The firm is now calling Microsoft a "best idea" for long positions, while Apple has just been taken off that same list. To be clear, both companies are rated buys, and Arete has given Microsoft a $40 price target while Apple carries a $850 price target, both representing healthy upside from current prices.

Let's dig into the rationale behind each move.

On Microsoft
Arete believes that Windows 8 will be a "panacea" for the software giant's consumer franchise and will help the company move forward in devices while making its software business subscription-based. By milking more out of its software using a subscription model instead of its traditional license sales, Microsoft could spur revenue growth as low-cost devices continue to be distributed.

The analysts think that the launch of Windows 8 will be a smashing success, and effectively herald in a new day for the software giant.

On Apple
In contrast, Apple has been playing its product launches a bit more conservatively in recent times, releasing devices that are considered "incremental steps" instead of "giant leaps." iPhone 5 expectations remain sky-high, and Arete thinks they may be too high and that the company might not be able to post a blowout relative to those high hopes.

Taking Apple off its "best ideas" list is primarily hinged on what the firm sees as "gradual incremental change" amid a competitive landscape that has no signs of letting up.

Two wrongs don't make a right
The biggest oversight with Arete's stance on Microsoft is that it assumes that Windows 8 will be a success. I'm the first to admit that the new platform has incredible potential to revolutionize mobile computing, especially if Apple is wrong with its "post-PC" rhetoric and belief that tablets are an entirely different category of device.

Microsoft believes tablets are an extension of the PC category and that "PC-Plus" is the world we live in. The idea of a unified PC with both desktop and touch interfaces is appealing, but the biggest uncertainty there is the execution, which relies heavily on other players in the PC value chain, including OEMs and component suppliers. 

For example, if Hewlett-Packard (NYSE: HPQ  ) doesn't come up with compelling industrial designs or Intel (Nasdaq: INTC  ) chips fail to deliver in power efficiency, Microsoft might suffer for it.

There's a very real chance that Windows 8 will bomb, especially since there's not a lot of reason for Windows 7 users on traditional form factors to upgrade. The flip side of that coin is there's also a very real chance that Windows 8 will be major paradigm shift. Only the market will say for sure.

Transitioning to a subscription-based model, like Microsoft is doing with Office 365, is absolutely a boon for the top line, but Google (Nasdaq: GOOG  ) is turning up the heat in cloud-based productivity software with its Google Apps.

Apple has indeed been playing it safe in recent times, but this is in part because the iPad maker is still riding the momentum of its last major innovative risk: the iPad. That was just two years ago, and trends this big can be ridden for years on end. In the interim -- before whatever major breakthrough it has up its sleeve (TV?) -- it can sit back and churn out incremental upgrades, and consumers will gladly snap them up. No company can be expected to launch revolutionary products each and every year. Not even Apple.

Overall, Microsoft has much more uncertainty in the short-term regarding the launch of Windows 8, while Apple can continue its current trajectory for a little while longer with less downside risk. I'd say Arete is wrong on both counts.

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Evan Niu, CFA, owns shares of Apple. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (7)

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  • Report this Comment On October 02, 2012, at 8:48 PM, applefan1 wrote:

    I predict that Windows 8 will capture about 25 to 30 percent of the WIndows market share if consider the laptop/desktop/tablets in that calculation. Windows 8 in the tablet market I don't think is going to do that much if you separate it and compete against the iPad.

    What's happening in the desktop/laptop market is that people are STILL hanging on to WIndows XP and reluctantly switching to WIndows 7 and only a small portion will move to Windows 8. It's getting more confusing so I think Microsoft will lump all of the variations into one category, whereas Apple separates OS X from iOS.

  • Report this Comment On October 02, 2012, at 9:23 PM, TheDumbMoney wrote:

    Here's the thing, Evan. Only about 50% of PCs are even using Windows 7 as of July 2012. Windows 8 is not properly viewed as revolutionary. It is evolutionary. It is just evolutionary in a different sense: it will allow those who wish to evolve to a tablet experience to do so, while Windows 7 will continue to be a major, major factor in non-tablet desktop and laptop sales for years to come, and it will probably still be the majority system on Wintel computers three or even five years from now.

    This is why when people like Vitaliy Katznelson FTFO about the Windows 8 form factor after a few hours of use, I don't really get it. I mean I get it, but I don't. The removal of support for Windows XP won't even end until April 2014, and that will drive sales of both Windows 7 and Windows 8, with people not keen on Windows 8/tablets perfectly able to buy a computer with WIndows 7 for years to come, or upgrade to that version of Windows from XP. In fact, to highlight the parallel nature of Windows operating systems, to this day you can still buy refurbished Windows XP desktops/laptops online, including on , there is still demand even for that product.

    In short, Windows 8 presents a new option. New versions of Windows must work well or suffer the fate of Vista, but they are not like new model years for cars. Microsoft is going way out on a limb with Windows 8, but underneath that limb is a padded gym mat that is called: Future Sales and Upgrades of Windows 7 for Years to Come.

    Long Apple (since summer 2011, accumulated through $570), Intel (since early 2009, accumulating), Microsoft (since early 2009, accumulating), and Google (since mid-2010).

  • Report this Comment On October 03, 2012, at 3:18 AM, faust445 wrote:

    in general windows 8 is a completely different animal than its predecessors. for one, you gain at least 1/3 more speed. and for power users and/or corporate users this is a huge reason to upgrade. even more importantly, look at corporate users (and that's a huge lot) - the idea of seamlessely having date available in real time and updated in real time on your windows phone 8, tablet, and other devices is a model that Apple is years away from being able to provide. Windows 8 users are not going to be light weight users like the ipad users. people buying into windows 8 will be people doing real works. but eventually the appeal will spread to consumers because the model is so very productive that the ipad looks like a gameboy in comparison. It's unfortuante that most people are completely missing the point on windows 8 and comparing it to previous versions. it's a completely different game. cross device, cloud enabled with 'push' data in real time, all the time is key. why so many people miss this point must be due to microsoft bad marketing communication. also, their subscription model will be highly scalable because don't forget that cloud services beyond basic services will also add huge revenue upside for msft.

  • Report this Comment On October 03, 2012, at 7:45 AM, jdmeck wrote:

    I just don't see it. Microsoft is not going to have enough success or new business to justify the price target.

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