SAN FRANCISCO, CA - MAY 09: A pedestrian walks by a window display featuring the iPhone 4 at an... [+]
For more than five years, Apple (NASDAQ:AAPL) had an unquestionable lead over Microsoft (NASDAQ:MSFT). Its mobile devices had gained favor among customers at the expense of traditional desktop and laptop computers powered by Microsoft Windows. Even its MacBooks series had a big comeback, beating traditional notebooks by a big margin.
Reflecting this lead, Apple’s stock that had been lagging Microsoft’s stock in the 1990s and most of the early 2000s began to rise by leaps and bounds, gaining close to 300 percent over the last five years, while Microsoft’s stock barely budged.
That was then. But what’s next? Which stock is likely to be a better investment for the next five years?
The future continues to be bright for both companies.
First, they are the world’s leading innovative companies, and continue to churn out new products and services, creating new markets. Apple continues to unveil new versions of its iPhone and iPad, and come up with new features for its MacBooks. Microsoft continues to churn out new versions of its Window system, and expand its presence in the device area.
Second, they are still trading at a reasonable PE; Apple is trading at a forward (Sept 2013) PE of 12.15, while Microsoft is trading at a forward PE of 8.98 (Jun 30, 2014).
| Company | Apple | Microsoft |
| PE | 12.15* | 8.98** |
| Operating Margins | 35.62% | 37.92% |
| Total Revenue | $148.81B | $73.72B |
| Qtrly Revenue Growth (yoy) | 22.60% | 4% |
| Qtrly Earnings Growth (yoy) | 20.70% | -2.40 |
*Fye Sep 24, 2013
**Fye Jun 30, 2014
Nonetheless, I believe the time may be ripe for aggressive investors to consider switching out of Apple and into Microsoft.
After sharp growth for almost a decade, Apple is running into a number of problems every fast growth technology company runs into. First: manufacturing issues, as has been the case with Apple’s partner Foxconn. Second: quality issues, as has been the case with the map disaster. Third: market cannibalization, as new mobile devices take away business from older devices and the MacBooks. Fourth, market saturation.
And fifth, competition issues from existing or emerging competitors, as in the case of its iPad product.
With Google‘s (NASDAQ:GOOG) Nexus 7 selling out at the Google Play store and Microsoft releasing its Surface tablets, Apple is now facing pressure in an industry it has dominated for years, not to mention competition from Amazon’s (NASDAQ:AMZN) Kindle Fire.
But what makes Microsoft a better bet than Apple going forward is not Apple’s problems, but its capabilities to win the next war -- the merging of the laptop and the tablet.
With its Windows 8/RT operating systems, Office Suite and built-in keyboard, the Microsoft Surface has bridged the gap between laptop and tablet, appealing to users who seek the full functionality of a laptop rather than a smartphone in a tablet. Google, on the other hand, targeted the market for 7″ tablets and enticed consumers with a significantly lower price point than the iPad.
What does this mean for investors? Microsoft and Google should be able to take away market share in the tablet industry from Apple.
The bottom line: Apple has won the last war, but Microsoft is back; and it has the capabilities to win the next war; unless Apple has a new weapon in its arsenal we don’t know about.
Also read:
Why Google's Nexus 7 and Microsoft's Tablets Will BEat The iPad
Disclosure: Long on MSFT, short on AMZN
