Apple (NASDAQ:AAPL) versus Microsoft (NASDAQ:MSFT) is one of the battles for the highest valued stock in the U.S. market. But investors shouldn’t concern themselves with which one has the highest market capitalization — AAPL or MSFT — but which one has built the best value for shareholders, including dividends.
Now, for sure, Apple remains the darling of the market and the media. Little is said about this company and its products that’s very critical. What is said is often gushing with praise, as if the folks in Cupertino’s spaceship of a headquarters continue to miraculously improve the lives of the entire planet.
Meanwhile, in Redmond, MSFT just plods along with less fanfare transforming its offerings that are increasingly empowering companies and individuals worldwide.
But the news peg that got Apple a lot of attention came when it recently hit a market capitalization of $1.09 trillion — a record in the U.S. stock market.
But things have calmed down during “red October” and “negative November”. AAPL has settled down to a value of $837.04 billion. And now, MSFT stock is closing in at taking the market cap crown away with its current value of $836.21 billion.
But what does this matter? Instead, what the market should care about is how the stocks are valued when it comes to the price-book and the price-sales. And how both of the companies have been building their book value and overall sales.
Growth, Not Just Size
Right now, Apple’s stock is valued at a price-book of 7.83 times and price-sales of 3.30 times. Microsoft is valued at a price-book of 9.66 times and a price-sales ratio of 7.20 times. That makes MSFT stock more highly valued on both metrics and perhaps less of a value. However, it is important to see how the companies are doing to build up the book and sales.
For this, let’s look at the growth in book for both companies. For the calendar quarters from December 2016 to September 2018, Apple saw its book value fall 10.56% while Microsoft got its book value up 5.67%. And the price-book ratios improved for Apple by 117.83%, while Microsoft’s improved by only 74.11%.
This means that Apple’s stock got fluffed up a lot more than MSFT stock while the underlying net assets dropped for Apple while they rose for Microsoft. That’s more important for investors.
As for sales, Apple had its sales drop by 19.72% while Microsoft sold more gaining 12.58%. And then the price-sales ratios jumped for Apple by 47.55% while Microsoft rose by a smidge less at 45.18%.
This means that Apple saw sales drop while Microsoft’s rose, and the market valued both stocks at similar higher ratios. But for investors, Microsoft’s sales gains are what’s better.
The Payouts & Scorecard
Then there’s the dividends. And neither pay much with Apple’s dividend yield at 1.67% and the yield on MSFT stock at 1.70%. Both companies have raised distributions over the past five years with Apple seeing increases averaging 10.84% annually — while MSFT has average annual increases of 12.14%. But Apple is the stingier with a payout ratio of 22.6%. At 78%, Microsoft is a bit stretched.
So, on this front, for income, Apple has the edge in a better-defended dividend … but neither are threatened to have to cull their payouts.
But the proof for investors can be seen in the scorecard of the total returns in their respective stocks. For the past five years, it is MSFT that has been the victor with a return of 224.81% to Apple’s 146.98%.
What’s Working & What’s Not
Let’s look at some of the recent developments for Microsoft and Apple that might point the way for which will better serve investors.
Starting with Microsoft, the company has generated a total return of 30.71% for the year to date continuing the five-year positive performance.
And yes, the stock has pulled back a bit from its ascent during red October and negative November — but there is much that this company continues to do right. Most importantly, Microsoft is a leader in the move I’ve been tracking by technology companies to move their focus away from unit sales and toward recurring income.
One of the best sources for Microsoft is its Azure cloud computing unit. The innovation there isn’t just about taking a piece of the expanding cloud market, but also offering new adaptations of its cloud offerings that make its services more competitive for specific industries. A new example is a co-op with the Australian company Majans.
Majans is in the snack foods market. And one of the challenges for this company and the market is how to keep bags of potato crisps crisp as their customers rip open the packages. Moisture is a demon for crisps and therefore for companies like Majans, as well as more recognizable Mondelez (NASDAQ:MDLZ) or PepsiCo (NASDAQ:PEP).
Microsoft and Majans have come up with a new system that uses a beam of light to internally measure moisture levels in crisp bags and processes the data via the Azure systems. At a minimum, it demonstrates why the company is winning in the cloud space. But while it may be a small start, I see Microsoft taking this on the road for other companies.
And most importantly, it demonstrates that the company continues to build on its capabilities to build up its book and sales figures that I discussed earlier.
Apple has not had as good of a year as Microsoft. Year-to-date, its stock has underperformed with a return of only 6.56%. And there are reasons for this as I’ve continued to follow the increasing challenges of Apple.
First, we continue to have reports of supplier and assembly cutbacks, which point to lower unit sales of the company’s core iPhone products. This is very important, as the fewer units means fewer potential buyers of applications and other services, which Apple needs to generate more recurring income.
Now we have more problems on this front. Japan is a big market for Apple, representing 8% of its revenue as of the most recent reported quarter. This is important, as it has lost market share in China as well as the rest of Asia, while Europe is just flat and North America is down from the previous quarter.
Japan is now slowing its demand for newer iPhones as it follows other markets into lower adoption of the next phone models. The primary telecom companies in Japan are demanding higher subsidies from Apple to offer its iPhones on their networks and in their stores. This means tighter margins for the company and shows that its unit growth is in more trouble.
Then we come to the big problem that the company is facing with the Supreme Court of the United States. The company is being sued in the case of Apple Inc. v Pepper, in which Apple customers are alleging anti-trust violations in application (app) sales.
The customers are saying that since Apple apps can only be bought through the company and not from other vendors — as opposed to the model widely used for Android devices from Alphabet’s (NASDAQ:GOOGL) Google — Apple effectively controls the price and fees for listing apps on the Apple platform.
If SCOTUS rules against Apple, it will open up a myriad of class-action lawsuits that would cost Apple in refunded payments and might force the company to open up its platform for apps to third-party companies. This could result in a massive hit to its services revenue, which are already under threat from slower unit sales.
The case facing SCOTUS revolves around the 1977 case known as Illinois Brick. In this case, the state of Illinois argued that there was collusion by brick manufacturers, which raised prices for construction. SCOTUS decided that the plaintiffs were indirect consumers and not direct purchasers of the bricks so that they could not sue.
There are some exceptions cited in the verdict. One of them is that if the consumers are at the end the controllers of the product, then they would have standing. This could apply to Apple customers, as the apps are in the end the property of the customers.
It will take some time for the verdict and then the subsequent class-action suits to be filed. But it is an ominous cloud on the horizon for Apple.
Another potential source of grief for Apple is Amazon (NASDAQ:AMZN), which has a competing product to Apple’s Apple Pay with its Amazon Wallet. Right now, Apple has been spending a lot of money and time trying to get Apple Pay into retailers. But with Amazon being a much larger platform with more diverse users across platforms, it would make for a better choice for retailers to adopt the more universal service for point-of-purchase transactions.
For me, this is one more example that Apple is missing out by not opening up its potential universe by licensing its operating system and opening up its platform. For now, Apple is on hold, but watch for my final call on this troubled stock soon.
Making the Call
Bloomberg tracks the major Wall Street Analysts that follow Microsoft and Apple. And it compiles the recommendations with the number of buys, holds and sells. It shows 38 analysts for Microsoft and 48 for Apple. And right now, Microsoft has 92.10% buys, 2.60% holds and 5.30% sells. Apple only has 55.30% buys, 39.60% holds and 4.20% sells.
My call for this battle for investor’s better returns is for Microsoft over Apple.
Neil George is the editor of Profitable Investing and does not have any holdings in the securities mentioned above.