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.
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.
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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