Although the COVID-19 omicron variant is expected to be less lethal and disruptive than previously anticipated, the markets are still highly volatile. The potential of a COVID-19 resurgence exacerbating the current supply chain crisis is making investors anxious. Indeed, the CBOE Volatility Index has surged 10.6% over the past five days.
The constituent companies of FAAMG, which represents Meta (formerly Facebook), Amazon, Apple, Microsoft, and Alphabet’s Google, are expected to hedge the systematic market risk to a certain extent because it consists of some of the world’s biggest tech companies. With rapid tech integration in virtually every industry, technology is expected to be a driving force for economies worldwide.
Apple, Inc. (AAPL) is the largest company globally, with a $2.86 trillion market cap. In comparison, Microsoft Corporation (MSFT) is one of the largest software companies in the world. With a $2.47 trillion market cap, it is a major competitor to AAPL. In fact, MSFT briefly overtook AAPL to become the most valuable company (in terms of market cap) in October this year. Both AAPL and MSFT are currently racing to become the world’s first three trillion-dollar company.
MSFT shares have gained 53.3% over the past year, while AAPL has gained 43.2% over this period. In terms of year-to-date performance, MSFT is the clear winner with 47.6% gains vs. AAPL’s 31.4% rise. However, shares of MSFT have slumped 2.5% in price over the past month, while shares of AAPL have risen 16.2%.
But which stock is a better buy now? Let’s find out.
Latest Developments
In early October, AAPL announced 10 new initiatives in line with its carbon neutrality goals. Approximately 175 AAPL suppliers are expected to transition to renewable energy, which is expected to reduce carbon emissions by 18 million metric tons. The company is on track to achieve net-zero emissions across its supply chain by 2030.
Also in October, AAPL opened a new store in Istanbul, Turkey, marking its third retail location in the country. This reflects the growing demand for AAPL products across the country. The company also launched breakthrough M1 Pro and M1 Max chips for its computers, which are the most powerful chips developed by AAPL to date.
On December 1, MSFT announced the general availability of a stand-alone Microsoft Teams offering designed for small businesses. This software supports collaboration, connection, and productivity in a hybrid working environment at competitive rates. Given the rising adoption of hybrid work structures, the affordable Teams software is expected to rake in substantial revenues for MSFT.
In November, MSFT entered a 15-year strategic partnership with AES Corporation to provide around-the-clock renewable energy to MSFT data centers in Virginia. This development is a landmark step toward MSFT’s commitment to achieving its net-zero carbon emissions goal by 2025.
Recent Financial Results
MSFT’s revenues increased 22% year-over-year to $45.30 billion in its fiscal 2022 first quarter, ended September 30, 2021. Its operating income improved 27% from the same period last year to $20.20 billion. And its non-GAAP net income was $17.20 billion, up 24% from the prior-year quarter, while Its non-GAAP EPS rose 25% from the year-ago value to $2.27.
For its fiscal 2021 fourth quarter, ended September 25, 2021, AAPL’s revenues improved 28.8% year-over-year to $83.36 billion. Its operating income came in at $23.79 billion, up 61% from the same period last year. And its income and EPS rose 62.2% and 69.9%, respectively, from the prior-year quarter to $20.55 billion and $1.24.
Past and Expected Financial Performance
MSFT’s revenues and net income have increased at CAGRs of 15.3% and 53.4%, respectively, over the past three years. The company’s EPS rose at a 54.4% CAGR over this period, while its tangible book value increased at a rate of 30.1% per annum over the past three years. Also, the company’s levered free cash flow increased at a 19.5% CAGR over this period.
In comparison, AAPL’s revenues have risen at an 11.3% CAGR over the past three years, while its net income improved at a 16.7% CAGR over this period. Its EPS and levered free cash flow have risen at CAGRs of 23.5% and 15.6%, respectively, over the past three years. However, the company’s tangible book value declined at a rate of 16.2% per annum over this period.
Analysts expect MSFT’s revenues to rise 17.2% in its fiscal second quarter (ending December 2021), 15.3% in the next quarter, and 16.5% in the current fiscal year (ending June 2022). The company’s EPS is expected to rise 13.7% in the current quarter, 11.6% in the next quarter, and 15% in the current year.
Conversely, the Street expects AAPL’s revenues to rise 5.4% in its fiscal first quarter (ending December 2021) but decline slightly in the next quarter. The consensus EPS estimates indicate an 11.9% year-over-year improvement in the current quarter but a 6.5% decline in the next quarter. The company’s revenue and EPS are expected to improve 3.7% and 1.7%, respectively, year-over-year in the current fiscal year (ending September 2022).
Profitability
AAPL’s trailing-12-month revenue is 2.08 times MSFT’s. However, MSFT’s 68.86% trailing-12-month gross profit margin is significantly higher than AAPL’s 41.78%. Also, MSFT’s 48.65% trailing-12-month EBITDA margin is 1578 basis points higher than AAPL’s 32.87%.
In addition, MSFT’s net income and levered free cash flow margins of 38.51% and 28.27%, respectively, compare with AAPL’s 25.88% and 20.04%.
Valuation
In terms of forward non-GAAP P/E, MSFT is currently trading at 35.83x, which is 17.2% higher than AAPL, which is currently trading at 30.56x. In addition, MSFT’s 14.03 and 30.08 respective trailing-12-month Price/Sales and Price/Cash Flow multiples are slightly higher than AAPL’s 7.96 and 27.49.
However, AAPL’s 2.61 forward non-GAAP PEG ratio is 12% higher than MSFT’s 2.33. Also, MSFT’s 16.22 trailing-12-month Price/Book multiple compares with AAPL’s 45.39.
POWR Ratings
MSFT has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. AAPL, on the other hand, has an overall rating of C, translating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Both MSFT and AAPL have a B grade for Quality, which is in sync with their higher-than-industry net profit margins and ROE. In addition, MSFT has a B grade for Stability, which is in sync with its 0.87 beta. AAPL, in comparison, has a C grade for Stability. This is justified, given the stock’s relatively high 1.20 beta.
Of the 168 stocks in the Software – Application industry, MSFT is ranked #15. In comparison, AAPL is ranked #26 out of 51 stocks in the Technology – Hardware industry.
Beyond what we have stated above, we have rated AAPL and MSFT for Growth, Momentum, Sentiment, and Value. Click here to view all MSFT ratings. Also, get all AAPL ratings here.
Click here to check out our Software Industry Report for 2021
The Winner
AAPL is currently facing multiple antitrust allegations from the United States Federal Trade Commission, European Union, and other regulatory bodies. The company might also face an antitrust suit from the Department of Justice. Given this backdrop, MSFT, with higher profit margins and solid growth potential, is expected to be a better investment now.
Our research shows that the odds of success increase when one bets on stocks with an overall POWR Rating of A or B. Click here to view the top-rated stocks in the Software – Application industry. Also, view the top-rated stocks in the Technology – Hardware industry here.
AAPL shares were trading at $175.94 per share on Wednesday afternoon, up $1.61 (+0.92%). Year-to-date, AAPL has gained 33.41%, versus a 25.21% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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