Is Microsoft Stock Still Attractive After Briefly Regaining Market Cap Title?

AAPL stock offers a more appealing valuation than MSFT stock, but MSFT is more stable

By Will Healy, InvestorPlace Contributor

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Microsoft (NASDAQ:MSFT) has accomplished something that looked elusive even a few months ago; it briefly reclaimed the title of world’s largest market cap. The software giant held this title for much of the dot-com boom, but after tech stocks crashed in the early 2000s, MSFT stock sank. As a result, other companies’ market caps surpassed that of MSFT.

With Microsoft sparring with its old nemesis Apple (NASDAQ:AAPL) for this title, it’s natural to ask whether it’s a good time to buy MSFT stock. Although MSFT stock is still attractive, the recent tech slump complicates the issue.

MSFT Stock Has Made a Comeback

In recent years, Apple had the title of world’s largest market cap. AAPL held this title for five years after battling Exxon Mobil (NYSE:XOM) for the position in the early part of the decade.

Microsoft’s market cap lagged meaningfully behind a few of its peers until very recently. As late as the second quarter of this year, the market cap of MSFT stock was lower than those of Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Amazon (NASDAQ:AMZN), as well as that of Apple, which basked in its $1 trillion-plus market cap.

Microsoft’s stability enabled it to regain the top spot on Friday before Apple recaptured it on Monday. Apple’s iPhone-driven decline has taken its stock down by more than 25% since the end of Q2. Conversely, Microsoft stock trades only about 8% off its October highs. Little wonder that MSFT is the only major tech company to hold a AAA credit rating.

Other factors bolster MSFT stock as well. As InvestorPlace columnist Luke Lango wrote, “Microsoft has become the hottest company in arguably the hottest market: cloud computing.”

Microsoft stock also trades at a price-earnings ratio of about 24, a reasonable multiple given the strength of the company’s cloud business and the fact that its profit is growing by double-digit percentage levels. These attributes alone could justify buying Microsoft stock.

AAPL Stock Is Poised to Make Its Own Comeback

However, I think InvestorPlace columnist Vince Martin rightly asks a more important question: Is MSFT stock the best equity in the market to buy? At this time, I lean towards answering that question with a “no.”

Here’s why.

Microsoft and Apple have engaged in a bitter rivalry since the 1980s. This rivalry has now outlived the careers of its original protagonists, Steve Jobs and Bill Gates. At this point, Apple CEO Tim Cook and MSFT CEO Satya Nadella have arguably taken the battle to a whole other level. After years of being dominated by Apple, Microsoft and MSFT stock may have the momentum again.

However, with this battle showing no signs of ending, one can bet that Apple will deliver a counterpunch. As a result, I think that investors can profit more by betting on an AAPL comeback than on MSFT’s superior performance continuing.

Apple has a trailing price-earnings ratio of just under 15, while the trailing PE of Microsoft stock is nearly 45. But over the next five years, analysts on average predict that the two companies’ top lines will grow at similar average annual rates: 13.68% for MSFT vs. 13.00% for AAPL. So by investing in AAPL instead of Microsoft stock, you pay about one-third the price for almost as much profit growth. Moreover, investors should remember that Apple has $237.1 billion of cash versus MSFT’s $135.88 billion of cash reserves.

Concluding Thoughts on MSFT Stock

MSFT stock is still attractive at current levels. However, due to tech stocks’ recent slump, other equities might be better investments at this point.

By once again becoming the world’s most valuable company, MSFT has shown that it has definitely made a comeback. Moreover, the fact that it achieved this feat by retaining most of its value during a market retreat affirms its rock-solid stability. For these reasons, MSFT stock remains a good investment.

However, in the wake of the tech slump, AAPL is much cheaper than Microsoft stock even though the companies’ growth rates are similar. For this reason, I would choose Apple over MSFT for now.

Still, the companies’ situations will change going forward. Furthermore, for anyone who wants the stability of a AAA credit rating and the most dynamic cloud company, MSFT stock remains the best choice.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/12/largest-market-cap-means-msft-stock/.

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