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Better Buy: Apple vs. Microsoft

By Donna Fuscaldo – Nov 14, 2019 at 10:30AM

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Shares of Apple and Microsoft are on a tear this year, but the Mac maker may be the better bet for investors as we close out 2019.

It's lonely at the top, particularly for the tech companies that are part of the trillion-dollar market capitalization club. 

As it stands, just Apple (AAPL 0.98%) and Microsoft (MSFT 0.84%) are members. At last check, Apple's market capitalization stood at $1.2 trillion while Microsoft's was at $1.14 trillion.

While Microsoft's business is booming thanks to its cloud computing prowess, Apple is in the middle of the holiday selling season, typically a strong-three month period for the iPhone maker. Plus, its focus on services has been providing numerous benefits to the company's financials. Its stock is also doing better than Microsoft's. So far in 2019, Apple's shares are up more than 75%, while Microsoft is trading about 40% higher. 

That's not to say they both aren't poised for more growth. It's just that Apple may do better, at least as we finish out the remainder of the year. Here's why. 

Apple's iPhone 11 is taking off

Apple had a rocky start to 2019 as the trade war and lackluster demand for its pricey iPhones weighed on its shares and its earnings results. But things have been improving on the iPhone front in recent months, which has done wonders for the stock.

In September, Apple rolled out its latest iteration of the iPhone. The Cupertino tech giant revealed three versions of the iPhone 11, with the low-end one priced at $699, cheaper than last year's comparable model. That was enough to get consumers to act both in the U.S. and abroad. Since the iPhone 11 hit store shelves, reports have surfaced that Apple has told suppliers to increase demand.

In addition to the iPhone 11, rumors are swirling that Apple is coming out with a smaller, cheaper iPhone in the early part of 2020 that could sell for as low as $399. That would give the Mac maker access to a whole new range of consumers that don't want a fancy phone but do want to access all of Apple's apps and services. The new smartphone is expected to have Apple's latest processor.

Apple iPhone 11 in various colors

Image source: Apple.

Microsoft isn't a maker of consumer smartphones, but it is also trying to innovate. At a recent Surface event, the software giant teased two new mobile devices that will be ready for the 2020 holiday season. One is a foldable tablet and the other is a foldable smartphone that will run on Android. Microsoft has been out of the smartphone market for years after failing to make a dent in Apple's business. Its return could be significant, but given its track record, Microsoft's device may not be a hit. For that reason, Apple is the better pick, at least on the consumer side of things. 

Apple's services segment is poised for growth

Outside of devices, Apple is also becoming a recurring revenue machine. The company knows it can't ride its iPhone business forever, even if it still represents much of its revenue, so in recent years it's been expanding its services offerings. That's been highlighted this month the launch of Apple TV+, its new streaming video service. Aimed at taking on the likes of Netflix, Disney, and Hulu, Apple is pouring tons of money into the effort and is attempting to undercut its rivals by pricing the service at $4.99 a month. 

Apple also has iTunes, its new Apple Arcade gaming service, and iCloud among other services to bank on. That focus on services paid off in its fiscal fourth quarter. Apple credited its growth in the three months ending in September to services, wearables, and iPads. Subscriptions grew by nearly 40%, and it now has 450 million paid subscribers.

That's not to say Microsoft isn't doing brisk business with subscriptions. Many of its corporate customers pay monthly to access Windows, Office, and other software in the cloud, supplying it with recurring revenue that provides stability and reliability. With the end of support for Windows 7 on Jan. 14, that could drive more upgrades to Windows 10. Still, with Apple rolling out so many new services, it could be a bigger windfall than what Microsoft earns from its corporate clients. 

Trade deal progress could lift shares of Apple

Then there is the trade war the U.S. and China have been embroiled in for months. While Microsoft is seen as a safe haven since its business isn't as affected by what's going on between Washington and Beijing, any positive developments on that front could boost Apple's stock more, giving shares a short-term shot in the arm.

In October, Apple's stock set an all-time high after reports surfaced that both sides were making progress on a trade deal. If the U.S. and China can reach an agreement in November, it could be a boon to Apple's business, largely because it won't be forced to raise prices or shoulder the cost of the tariffs. If an announcement is made about a deal, Apple's shares could jump even more. Microsoft may get a lift as well, but Apple investors may benefit from a bigger relief rally.

Then there is Apple's outlook for the remainder of the year. Its fiscal first-quarter revenue guidance of $85.5 billion to $89.5 billion topped Wall Street views. With $205.9 billion in cash on hand, new services just launching, and consumers falling back in love with the iPhone, there are a lot of reasons to like Apple over Microsoft as 2019 comes to a close.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Donna Fuscaldo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Microsoft, Netflix, and Walt Disney and recommends the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, long January 2021 $60 calls on Walt Disney, long January 2021 $85 calls on Microsoft, and short January 2020 $130 calls on Walt Disney. The Motley Fool has a disclosure policy.

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