Microsoft Vs. Apple: Does Equal Size Mean Equality?

By Ryan Barnes | April 16, 2010 AAA
Microsoft Vs. Apple: Does Equal Size Mean Equality?

Microsoft (Nasdaq:MSFT) and Apple (Nasdaq:APPL) are goliaths, two of the largest companies on the planet. Microsoft is a $270 billion company, while Apple is valued at a slightly lower $225 billion, based on their current stock prices. Yet just a decade ago, the thought that Apple's worth could be in even the same ballpark as Microsoft would have been ludicrous. The gap has closed, thanks to an amazing resurgence of Apple over the past 10 years. To say that Apple was teetering over the cliff before catching itself is not hyperbole.
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Since December, 2000, Apple's stock price has grown over 3,500%, from merely $7 per share to over $245 today. Over that same time period, Microsoft's stock price has risen a paltry 65%. It's a complete reversal from the prior decade, when Microsoft skyrocketed nearly 4,000% while Apple didn't make a single dime for investors. So while their paths have been different, the end result is that both companies are leaders in their industries and household names for investors. But what does the future hold? (Level up your winnings by investing in this fast-paced, highly skilled industry. Find out more in Power Up Your Portfolio With Video Game Stocks.)

The 2000s: Apple's Decade
There's no doubting that Apple has ruled the past decade. The company has been the better innovator and more prescient. It's rewrite of history, following the initial Apple vs. Microsoft battle in the mid-1980s. Microsoft won that battle as the PC - and Windows software - became the de facto standard around the world. Apple was relegated to a minority status, and the stock performance of the two companies in the '90s reflects that.

But then, digital music came along, and Steve Jobs saw an opportunity to carve out a new leadership space. And so the iPod was born, a quantum leap forward in terms of design and usability. Determined not to miss the brass ring this time, Jobs & co. created the iTunes store for downloading music, videos, books and other media.

In 2007 Apple released the iPhone, another cult sensation and another device that could connect seamlessly with the iTunes store of software and entertainment. The love affair with everything Apple even spilled over to Mac computers, which have been steadily gaining market share for several years.

By contrast, Microsoft's past decade has been filled with misfires (think Windows Vista), antitrust lawsuits and the general difficulty of getting bigger when your software is already run on 90% of the world's computers. (Would a similar crisis have occurred if iPhone investors were offered the same loan options as homeowners? Find out, in Dialing In On The Credit Crisis.)

Comparing their Stocks Today
Microsoft is, on the surface, the "safer" stock. Microsoft takes in more revenue, earns more in net income and shares trade for a lower multiples. Apple, meanwhile, has more good expectations built in to the stock price. AAPL shares trade for a higher multiple of current earnings at 24 times, but this has been justified because Apple is growing those earnings much faster than Microsoft. Between 2007-2009, Apple more than doubled its net income, despite one of the worst recessions in U.S history. Microsoft, meanwhile, grew net earnings less than 5% over the same time period.

Both companies have outstanding balance sheets, or the measure of their assets versus their liabilities; each has tens of billions in cash and nearly no debt of any kind. This not only provides protection in the face of problems, but more importantly provides the option to buy up companies and the freedom to invest in new products and technologies without worry of seeing an immediate financial benefit. Or, they can simply return that cash to shareholders in the form of dividends and stock repurchases. (A CEO shapes the direction a business will take. We provide four clues to help you determine which ones have the right stuff, in CEO Savvy And Stock's Success Go Hand In Hand.)

Who Has the Better Seat at the Table?
While there is certainly a rivalry between the two companies, they don't compete head-to-head in every corner of their business. While Apple is most focused on the "iWorld" of hardware devices, Microsoft's core is still its software business. Microsoft's new Windows7 operating system release is the company's best update in a decade, and sales have been strong. Apple, on the other hand, is an everyday consumer product company first and foremost; Microsoft's fate is very dependent on the health and spending patterns of large corporations via Microsoft Server software and Microsoft Office - the latter still the business oxygen breathed by millions of workers around the world.

Microsoft has tried its hand at several search engine technologies, and its Bing effort is by far the most impressive attempt to put a scare into Google. The company also defied many doubters by successfully carving out a space for itself in gaming with the Xbox and Xbox 360. Neither lines of business have had the same impact as Microsoft Windows, but it shows what kind of power comes with billions in cash and innovative thinking.

As for Apple, it is still riding a long wave with the iPhone and the just-released iPad. It will keep iterating new versions of these products in an effort to get at least one of them into the hands of everybody in America - for starters.

Two Superpowers
The polarity of the 1990s and 2000s isn't likely to repeat itself in the next ten years. It can be said with 99% assuredness that neither stock will rise 3,000% in the coming decade. The law of large numbers dictates that you can only build a plane so big if you want it to still fly. But that doesn't mean that both companies can't earn great returns for investors. In fact, if you own mutual funds, ETFs or index funds today, chances are you're already invested in both companies.

Both companies need a strengthening economy, and both thrive on the increasing tech-savvy nature of younger generations and computing that can go anywhere, anytime. Both are great stocks to follow because you, the investor, can have an intimate opinion based on your own experience with their products and services. Use it to your advantage.

Check out last week's business highlights in Water Cooler Finance: My iPad Beats Your Toyota.)

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