Apple Inc. (AAPL) vs. Microsoft Corporation (MSFT). Just a few years ago, that would hardly have seemed like a contest. Microsoft was a leftover from the PC era struggling to stay relevant, whereas Apple was blazing new trails and building in its image what seemed like a limitless mobile market.
Apple was the undisputed king of the world, and Microsoft was a filthy beggar looking for its next meal.
But now, flash forward to today, and it’s a very different contest. The mobile space is now nearly as saturated as the PC market, and Apple is struggling to find ways to maintain its sales, let alone grow them. Meanwhile, Microsoft is going head to head with Amazon.com, Inc. (AMZN) in cloud services for business — the most promising growth market in technology today.
So, is it really that bad for Apple? And has its old rival Microsoft leapfrogged it?
AAPL Vs. MSFT
It wouldn’t be the first time. AAPL essentially invented the personal computing market only to get outmuscled by MSFT in the early 1980s. By 1997, it had gotten so bad for Apple that Michael Dell infamously suggested that newly returned CEO Steve Jobs fold the company and return the cash to shareholders.
Let’s strip away all of the noise and take a good, hard look at both companies.
I’ll start with Apple. On the surface, it looks bad. AAPL just saw year-over-year quarterly sales fall for the first time in 13 years, and Carl Icahn — one of Apple’s biggest cheerleaders and (formerly) one of its largest shareholders — just announced that he had sold his entire position in AAPL stock.
The health of the Chinese economy was a major factor, but the overall message taken away by Wall Street was that the smartphone market is saturated, people are upgrading their phones less frequently and Apple has no great “it” product to carry the torch. AAPL is no longer a phenomenal growth story.
Let’s cut through the narrative here. Yes, Apple had a lousy quarter. No bones about it. But Apple was also up against some pretty tough comps. This time last year, consumers were still trading in their older small-screen iPhones en masse for the larger-screen iPhone 6 and 6 Plus. That was a one-off event fueled by pent-up demand that no rational person would have ever expected to be repeated.
But given that the average life of a phone is only about two years, it also means that Apple should benefit from a wave of upgrades in the coming year, come what may in China … or anywhere else for that matter.
It’s also worth repeating that, while Apple’s market share is not growing, this is largely because it avoids the lower-margin entry-level market. Apple maintains a strong lead in the high-end segment, and its users tend to spend a lot more money in the app store and overall ecosystem. Apple rakes in 91% of the profits for the entire smartphone industry.
I agree that Apple is no longer a growth stock. But here’s the thing — it’s not priced like one. Not even close, in fact. Right now, Apple is actually priced more like a no-growth utility stock (see “Apple Still So Cheap It’s Actually Ridiculous”).
Stripping out its gargantuan cash hoard, Apple trades at a mid-single-digit price-to-earnings ratio. So whatever you think of Apple’s growth strategy going forward, its existing businesses are very clearly cheap at today’s prices.
Now let’s look at Microsoft.
The story here is still intact. CEO Satya Nadella is doing a fine job of cleaning up the mess left behind by former CEO Steve Ballmer. While Ballmer chose to stick his head in the ground, ignore the mobile revolution and pretend that PCs were still a growth industry, Nadella is positioning MSFT for life after the PC.
While Amazon is currently the leader in business cloud services, I expect Microsoft to ultimately rise to the top as the dominant player given its decades of experience in serving business clients.
Time will tell, and I could be too optimistic here. But even if Microsoft remains a solid number two, it’s still in a fine competitive position going forward.
Alas, any transformation like this is going to be messy, and MSFT’s last quarterly release proved that the company is still far too dependent on PC-related businesses.
So, which is the better buy right now: AAPL or MSFT?
Personally, I’m long both and consider both fantastic holdings. But if I have to choose only one to hold for the next year, I’m going with AAPL.
MSFT trades hands at a forward P/E ratio of about 17, which I consider fairly reasonable. But AAPL sports a forward P/E of just 10, plus Apple has been more aggressive in raising its dividend and buying back shares.
And there is certainly a lot more negativity towards Apple right now, which — if you’re a contrarian — is a good thing.
Of course, no one ever said you have to choose. I recommend owning both.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long AAPL and MSFT.