Apple (APPL) has almost single-handedly redefined the consumer electronics market with innovative products, from changing the way we listen to music with the iPod to redefining the role of cell phones with the iPhone.
But don’t think this company is all fun and games. Apple continues to make inroads into the computer market and erode the market share of fellow tech icon Microsoft (MSFT). The Mac vs. PC rivalry is more than just a cute ad war.
Actually, I’m a big fan of those Mac vs. PC ads — and not just because they’re funny. It’s because I think they provide a glimpse into the corporate culture of each company. Apple is, at heart, an inventive company looking to grow by creating the next big thing. On the other hand, Microsoft is an established giant that keeps doing what it has always done well… then using the profits to purchase a smaller company’s ideas and leverage them to even bigger returns. Apple’s strategy is obviously much more glamorous and appeals to image-conscious consumers, however both of these strategies have merit.
Which of these tech powerhouses is a better investment right now? Take a look at some numbers:
Apple
Market Cap: $149.50 billion
2Q Earnings: $1.35 per share
2Q Surprise: +15.4%
Microsoft
Market Cap: $145.42 billion
2Q Earnings: $0.36 per share
2Q Surprise: +0.0%
Apple Thrives on Innovation
In 2004, as Apple’s iPod started to gain widespread appeal, and its iTunes store became one of the premier marketplaces for digital music, I quickly realized the potential of this company’s innovative approach to consumer electronics. I told subscribers to my Blue Chip Growth newsletter to buy this stock, and we rode it for almost four years to close out a stunning 250% profit in late 2008.
Many investors ask me if I think the stock is good investment right now. My simple answer is, “not yet.” Here’s why:
First, Apple thrives on innovation and managing its product cycles, and despite rumors about the company launching its own netbook “tablet,” Apple doesn’t have any new blockbuster products on the immediate horizon.
Second, the volatility in share price caused by speculation over Steve Jobs’ health makes this stock a little too risky for my tastes. A blue chip stock with a market capitalization of almost $150 billion should be a heck of a lot more stable than AAPL.
I run intensive screening and data-mining on more than 5,000 stocks each week that focus on two key factors: a stock’s current strength and its potential for future growth. So how does AAPL stack up on these two fronts?
Strength:
Apple sure has current strength. This summer, the company’s sold over 1 million next-generation 3GS iPhones in just three days after the new product hit the shelves in June.
What’s more, the company said it sold 2.6 million Macs in the second quarter, up 4% from a year ago, as the company continues to slowly gain a bigger share of the computer market. It’s performance like this that helped Apple increase both its 2Q profits and 2Q revenue by more than 10% compared with 2008.
Growth:
The future, unfortunately, is not quite as impressive for Apple. While the latest iPhone numbers are good, smart phone sales in general have been very strong, and AAPL hardly has the market cornered now that rivals like the Palm Pre and the Blackberry are gaining appeal.
What’s more, it shipped only about 10 million iPods in the second quarter, down 7% year on year.
There are rumors that Apple may be gearing up to take on Amzon.com’s Kindle e-reader, but any investor who puts his or her money behind a rumor is taking a risky gamble. Since this company relies on a strong product cycle, without any highly-anticipated offerings on the horizon, I have to be skeptical of Apple’s future prospects.
NEXT – Microsoft Thrives on Domination
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Microsoft Thrives on Domination
Microsoft and I go way back. In fact, MSFT was one of my first-ever recommendations in my Blue Chip Growth newsletter. I told subscribers to buy the stock in August of 1997, and we sold in early 2000 for a return of 123%!
We got out just in time too, because the harsh reality is that Microsoft really hasn’t done a lot of great things since the go-go days of the tech boom. Not that I blame them. Windows is a cash cow, and the software has achieved a level of dominance that is almost impossible for any product. This company is the true definition of a powerhouse with staying power.
But being a powerhouse doesn’t mean Microsoft is a profit machine. Like Apple, I give Microsoft a very similar rating: good current strength, but limited growth potential. Here are the details:
Strength:
You just can’t beat Windows or other Microsoft products. Even my Mac laptop uses Microsoft Office for word processing and spreadsheets, and PowerPoint has become synonymous with any visual presentation. MSFT is just as dominant as it ever has been in the software market.
Growth:
Aside from a foray with its Xbox, Microsoft hasn’t come up with any new revenue streams in a very long time. This means sales growth is incredibly difficult to come by — unless, of course, MSFT just repackages existing software and tries to get people to pay them again for an updated product. Not a very bright future for increasing profits and sales down the line.
Yes, the company has made a move to buy Yahoo! and is pushing into the search engine marketplace, but those moves will take a very long time to pay off. After all, it is going against Google — an Internet behemoth that has achieved the same dominance in its industry that Microsoft has achieved in software.
Apple Is Better Than MSFT, But Not Great
All in all, if I had to pick between the two, I would rate Apple as the winner. This stock is an OK investment, since one or two good product offerings could send shares soaring, and Microsoft is very slow when it comes to new ideas. But I would hardly mortgage the farm for this tech pick at this point in time.
Remember, this is just my take on Apple RIGHT NOW. As the past year has taught us, things can change on a dime on Wall Street. Here are some things I’d like to see happen at AAPL before I give this stock a ringing endorsement:
1. Renewed Focus on Computers
I’ll admit that I’m part of the Apple army, and I use a MacBook Air laptop when I’m on the road. But if this company wants to continue to maintain its presence in the computer market, it needs to continue to innovate and manage its products with the same zeal as its consumer gadgets. The iPod and iPhone were smash hits, but Apple needs to be competitive with its operating system and computers if it wants to really grow and thrive.
2. Less Focus on CEO Jobs
I don’t know how to make the future of Apple less linked to Steve Jobs’ medical records, but it needs to happen for me to have faith in this stock. As of right now, all it takes is one blog post about Jobs to send shares reeling, and that doesn’t sit well with me. I want a stock to move based on its sales and profits, not on the rumor mill.
3. More Impressive Numbers
For all the hype, the company’s earnings performance hasn’t been as impressive as I like. Yes, Apple has been growing its bottom line even in a recession; margins are at about 36%, so earnings and revenue are moving in lockstep. A larger profit margin would help earnings explode higher on even a small uptick in revenue — or allow the company to significantly grow earnings even if sales stay flat.
