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The Wall Street Journal's Brett Arends pitted Microsoft (Nasdaq: MSFT ) and Apple (Nasdaq: AAPL ) in his Upside column over the weekend. "Why Microsoft Beats Apple," reads the headline, leaving no doubt as to where he stands. I've been critical about Apple as an investment lately, but even I have to disagree with Arends here. Anyone who has to make a choice between the companies -- and goes with Mr. Softy -- may want to rerank those priorities.
Arends offers plenty of arguments in favor of his position:
- Microsoft trades at an enterprise value that is just eight times forward earnings. Apple fetches a slightly higher multiple of nine.
- Apple's 2% yield is nice, but Microsoft's 3.5% payout is nicer.
- Microsoft just rolled out updates to its two biggest profit drivers in Windows 8 and a tablet-friendly preview version of Microsoft Office for Windows 8 RT.
Those points make for a sound argument, but reality paints a different picture.
Cheap and cheaper
Forward profit multiples in the single digits are attractive, but that tells us nothing if we don't factor in growth. Analysts see Apple's revenue growing at a 24% clip in its new fiscal year, followed by another 15% pop in fiscal 2014. Profitability is also moving at a double-digit rate, with growth targets of 14% this year accelerating to 16% in fiscal 2014.
There's no other way of saying it: Apple is cheap. If an enterprise value of nine times this new fiscal year's profitability is attractive, how does less than eight times next year's estimate strike you?
What about Microsoft? Obviously, Windows 8 should create a major growth opportunity for the world's largest software company. Well, analysts don't see it that way. Wall Street's eyeing revenue growth of only 9% this fiscal year, ending in June. If you're banking on seeing the double-digit growth kick in the following year, the forecast there is just 8%. Earnings growth is also expected to fall well short of Apple's spurts in the future.
To be fair, Microsoft's valuation does drop down to less than seven times next year's target on an enterprise value, but if Apple keeps growing faster than Microsoft, either the two will switch sides or Apple's stock will be the capital appreciation victor.
Which scenario do you see as more likely to happen?
Yield to temptation
We live in income-intensive times, yet Apple didn't even begin to shell out quarterly distributions until earlier this year. Tech investors still know better than to buy a payout. After all, why stop at 3.5%? Buying into Hewlett-Packard (NYSE: HPQ ) lands investors a yield of 4%. Isn't that the smarter play on Microsoft's potential renaissance? If Windows 8 is a hit, either PC sales bounce back or Windows-fueled tablets finally make a dent in a market cornered by Android and Apple iOS.
However, you won't find too many people arguing in favor of HP these days. Microsoft's inability to make a difference in the "good enough" computing hotbeds of smartphones and tablets have hurt HP far more than it has hurt Microsoft itself. Chasing chunky yields can be dangerous to your financial health.
Investors also can't feel too confident with how Microsoft manages its money despite the generous dividend. It's not just that Apple has more than twice Microsoft's net cash or that it's earning more than twice as much these days. Microsoft has spent billions on ill-advised purchases of aQuantive and Skype over the years.
Will the next time it cuts a big check be great or a waste? Which scenario do you see as more likely to happen?
Windows 8 may be another Vista
It's too early to gauge the new operating system's success, but there doesn't happen to be a whole lot of excitement building for last month's Surface or the updates to Windows and Windows Phone.
What's going on here? Well, remember the whole cloud computing revolution? As more work and fun get done online, we have turned into a OS-agnostic community. Apple's iPad or Google's (Nasdaq: GOOG ) Chromebook would have never had a shot five or 10 years ago, but now that the software and diversions are served on the server end, even the mighty Microsoft Office isn't as weighty as it used to be.
Android, as an open source, will continue to be more attractive to hardware manufacturers than having to pay up for Windows or Windows RT licenses. Microsoft isn't going away, but its relevance should continue to fade with every passing year.
Apple, on the other hand, is on fire. Every incarnation of the iPad or iPhone is growing its reach -- and that's huge. The way Apple's ecosystem works, it's hard to abandon iOS once you've invested in so many apps.
But Apple isn't invincible. It is definitely susceptible, but more so at the hands of Google's Android than anything that Microsoft might do at this point. Apple has overcome Antennagate and, more recently, Apple Maps. It's a safe wager that Apple's 2013 introductions will continue to raise the bar.
Will Apple sustain greatness, or will Microsoft unearth it? Will Apple stock outpace Microsoft stock the way it has over the past decade, or will it be the other way around? Which scenario do you see as more likely to happen?
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