Microsoft's Advantage Over Apple is Not What You Think
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Microsoft (NASDAQ: MSFT) is much like Apple (NASDAQ: AAPL) in that both are high tech giants with very similar financials. The profit margins are high, the return-on-equities formidable, the dividend yield robust, the coffers are bulging with cash and the balance sheets are virtually free of debt. But Microsoft offers the potential for double digit capital gains that Apple does not appear to possess.
The two most recent analyst recommendations for Microsoft are Buys, one on July 20th by Griffin Securities and one on May 4th by Stifel Nicolaus, with the same target price of $38. That is about a one-third increase from the present price level of around $29.60. For Apple to offer a similar capital gains return, the share price would have to soar to almost $900 from the current level of about $595.
The two most analyst ratings for Apple lowered the price target, however. On July 26th, Hillard Lyons reiterated its Buy recommendation but reduced the target price from $740 to $735. The day before, July 25, ISI Group too reissued its Buy rating, but slashed the target price from $750 to $710. These represent about a 15% jump for the stock price of Apple, around one-half that projected for Microsoft.
Based on previous stock performance, Microsoft is much more likely to reward its shareholders with a higher price level, too. The high for Microsoft over the past five years is right around $38, reached in 2007. That represents the one-third price gain that the most recent analyst actions are predicting.
For Apple, the high over the past five years is $644, reached in early April of this year. Since then, Apple has fallen by 7.60%. Due to disappointing earnings, Apple is down for the last week of market action.
It does not appear as if earnings-per-share growth will be able to power Apple to $900 a share. At present, earnings-per-share growth is 82.63%. That is obviously unsustainable and is predicted to fall to 18.55% for the next year; and 20.55% for the next five years. Drop-offs like that in earnings-per-share growth do not take a stock from $600 to $900.
In addition, much of the future growth in earnings for Apple is expected by the company to emanate for China. That is hardly an undiscovered market for anything, particularly consumer electronics. At present, Apple trails the Samsung and Google (NASDAQ: GOOG) pairing. In the year that has transpired since the unveiling of the iPone 4S, Samsung and Google have been very active in attracting new customers.
Earlier this year, Samsung, as a result of its work with Google, became the top seller of mobile phones in the world. Just this week, Google and Samsung just introduced the newest version of the Android Operating System. Dubbed the "Ice Cream Sandwich," it was introduced in the the Galaxy Nexus smart phone in Hong Kong, evincing the importance of the Chinese market for these companies.
Third in China is Nokia Corporation (NYSE: NOK), which, since the introduction of the iPhone 4S last fall, brought the Lumia 900. At present, Nokia Corporation is number 2 in mobile phones sales on a worldwide basis. Nokia, working with Microsoft, could have the new Windows smart phone out before the iPhone 5 makes it to being the point of conversation at a Genius Bar an Apple Store.
Also carving our market share in China now to challenge Apple, according to a recent article in Forbes, is Xiaomi, "China's hottest smartphone company." As detailed in previous article on Motley Fool, mega-growth in China for iPhone sales is hardly a sure thing for Apple. There are many reasons why revenues from the People's Republic will not lead the share price of Apple higher.
The earnings-per-share framework for Microsoft is the type, however, that does lead to a higher stock price, although it is distorted by the recent $6.2 billion writeoff for the acquisition of aQuantive. Earnings-per-share growth for Microsoft over the past five years has been 9.80%. Due to the loss, earnings-per-share growth for this quarter is a negative 108.51%. For the year, it is a negative 25.91%. Next year, however, it is predicted to rise to 10.23%. Over the next five years, it is expected to remain in that range. Growth in earnings-per-share like that in a predictable range leads a share price higher as Wall Street rewards this while punishing the stock price for surprises when results are reported.
Recent earnings for the Seattle tech titan featured Microsoft Server and Tools revenue growing 12% for the year. Product revenue for Microsoft grew by 12% as both SQL Server and System Center did well. Enterprise Services revenue jumped by 15% from growth in the Premier product support and consulting services, providing almost one-quarter of the gains for the division. Operating income increased by nearly one-fifth 18% for the year. Microsoft Business raised its revenue by 6.6% for the year with a 9% increase in business customer revenues. These results for Microsoft should improve as the company just picked up Yammer for $1.2 billion to better its enterprise social networking solutions operations.
The new products from Microsoft are also promising, as are those from Apple. According to one IT professional, "...the momentum leading up to the release of Windows 8, Windows Server 2012 (I know most people don't care about servers, but we people in IT recognize that this one is going to be HUGE. Look out, VMware.), Microsoft Surface, Office, Windows Azure Virtual Machines, and Windows Phone 8...Bring your iPhone or Android phone into any Microsoft Store or AT&T that has the Lumia 900 available to try. Let someone show you how slick the OS is and how quickly you get stuff done."
Both Microsoft and Apple are great companies that used to have geniuses at the helm. Microsoft has fallen from its all time high reached back in December 1999 of a pre-split $120 a share. It could easily happen to Apple, which just touched its peak as a publicly traded company. Within the past decade, Apple was trading at $7. The unique advantage of Microsoft over Apple at present is that its price level is more conducive for returning larger capital gains, which will inevitably attract more investors.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Microsoft, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.