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Why Microsoft Is Worth More Than Apple

November 28, 2018

Apple (AAPL) vs. Microsoft (MSFT) is one of the battles for the highest valued stock in the US market. For me, though, the real question is which one has been building the best value for shareholders.

Apple remains the darling of the market and the media. Little is said about this company and its products that’s very critical, as if the folks in their Cupertino spaceship of a headquarters are miraculously improving the lives of the entire planet.

Meanwhile, in Redmond, Microsoft just plods along with less fanfare, transforming its offerings to increasingly empower companies and individuals worldwide.

The news peg that got Apple a lot of attention came when it recently hit a market capitalization of $1.09 trillion—a record in the US stock market.

But things have calmed down during Red October and Negative November, and Apple has settled down to a value of $837.04 billion. Well, Microsoft is closing in, with a current value of $836.21 and could take the market cap crown away.

But what does this matter? What I care about, and what the market should care about, is how the stocks are valued when it comes to the price to book and the price to sales—and how both of the companies have been building their book value and overall sales.

Growth, Not Just Size

Right now, Apple’s stock is valued at a price-to-book ratio of 7.83 times and price-to-sales of 3.30 times. Microsoft is valued at a price-to-book of 9.66 times and a price-to-sales ratio of 7.20 times. That makes Microsoft’s stock more highly valued on both measurements and perhaps less of a value. However, it is important to see how the companies are building up their book of assets and their sales.

For this, let’s look at the growth in book for both companies. For the calendar quarters from December 2016 to September 2018, Apple saw its book value fall 10.56% while Microsoft got its book value up 5.67%. And the price to book ratio improved for Apple by 117.83%, while Microsoft’s improved by only 74.11%.

This means that Apple’s stock got fluffed up a lot more than Microsoft’s stock at a time when the underlying net assets dropped for Apple and rose for Microsoft.

Meanwhile, Apple had its sales drop by 19.72% while Microsoft sold more, gaining 12.58%. The price to sales ratio jumped 47.55% for Apple while Microsoft rose a smidge less, at 45.18%.

This means that Apple saw sales drop while Microsoft’s rose, and the market valued both stocks at similar higher ratios. But for investors, Microsoft’s sales gains are plainly what’s better.

The Payouts & Scorecard

Then there are the dividends. Neither pay much, with Apple’s dividend yield at 1.67% and Microsoft’s yield at 1.70%. Both companies have raised distributions over the past five years, with Apple seeing increases averaging 10.84% annually and while Microsoft delivering average annual increases of 12.14%. But Apple is the stingier, with a payout ratio of 22.60%, while Microsoft is a bit stretched at 78.00%.

So, on the income front, Apple for now has the edge in a better-defended dividend—but neither look threatened enough to have to cull their payouts.

The proof for investors can be seen in the scorecard of the total returns in their respective stocks. For the past five years, Microsoft has been the victor with a return of 224.81% to Apple’s 146.98%.

What’s Working & What’s Not

Let’s look at some of the recent developments for Microsoft and Apple that might point the way for which will better serve investors.

Starting with Microsoft, the company has generated a total return of 30.71% for the year to date, continuing the five-year positive performance.

And yes, the stock has pulled back a bit from its ascent during Red October and Negative November, but there is much that this company continues to do right. Most importantly, Microsoft is a leader in the move I’ve been tracking by technology companies to move their focus away from unit sales and towards recurring income.

One of the best sources for Microsoft is its Azure cloud computing unit. The innovation there isn’t just about taking a piece of the expanding cloud market, but also offering new adaptations of its cloud offerings that make its services more competitive for specific industries. A new example is a co-op with the Australian company Majans.

Majans is in the snack foods market. And one of the challenges for this company and the market is how to keep bags of potato crisps crisp as their customers rip open the packages. Moisture is a demon for crisps and therefore for companies like Majans, as well as more recognizable US companies like Mondelez (MDLZ) or PepsiCo (PEP).

Microsoft and Majans have come up with a new system that uses a beam of light to internally measure moisture levels in crisp bags and processes the data via the Azure systems. At a minimum, it demonstrates why the company is winning in the cloud space. But while it may be a small start, I see Microsoft taking this on the road for other companies.

Most importantly, it demonstrates that the company continues to build on its capabilities to build up its book and sales figures that I discussed earlier.

Apple has not had as good of a year as Microsoft. Year to date, its stock has underperformed, with a return of only 6.56%. There are reasons for this, as I’ve continued to follow the increasing challenges of Apple.

First, we continue to have reports of supplier and assembly cutbacks, which point to lower unit sales of the company’s core iPhone products. This is very important, as the fewer units means fewer potential buyers of applications and other services, which Apple needs to generate more recurring income.

Now we have more problems on this front. Japan is a big market for Apple, representing 8% of its revenue as of the most recent reported quarter. This is important, as it has lost market share in China as well as the rest of Asia, while Europe is just flat and North America is down from the previous quarter.

Japan is now slowing its demand for newer iPhones as it follows other markets into lower adoption of the next phone models. The primary telecom companies in Japan are demanding higher subsidies from Apple to offer its iPhones on their networks and in their stores. This means tighter margins for the company and shows that its unit growth is in more trouble.

Then we come to the big problem that the company is facing with the Supreme Court of the United States. The company is being sued in the case of Apple Inc. v Pepper, in which Apple customers are alleging anti-trust violations in application (app) sales.

The customers are saying that since Apple apps can only be bought through the company and not from other vendors—as opposed to the model widely used for Android devices from Alphabet’s Google (GOOGL)—Apple effectively controls the price and fees for listing apps on the Apple platform.

If SCOTUS rules against Apple, it will open up a myriad of class-action lawsuits that would cost Apple in refunded payments and might force the company to open up its platform for apps to third-party companies. This could result in a massive hit to its services revenue, which are already under threat from slower unit sales.

The case facing SCOTUS revolves around the 1977 case known as Illinois Brick. In this case, the state of Illinois argued that there was collusion by brick manufacturers, which raised prices for construction. SCOTUS decided that the plaintiffs were indirect consumers and not direct purchasers of the bricks, so they could not sue.

There are some exceptions cited in the verdict. One of them is that if the consumers are at the end the controllers of the product, then they would have standing. This could apply to Apple customers, as the apps are in the end the property of the customers.

It will take some time for the verdict and then the subsequent class-action suits to be filed. But it is an ominous cloud on the horizon for Apple.

Another potential source of grief for Apple is Amazon (AMZN), which has a competing product to Apple’s Apple Pay with its Amazon Wallet. Right now, Apple has been spending a lot of money and time trying to get Apple Pay into retailers. But with Amazon being a much larger platform with more diverse users across platforms, it would make for a better choice for retailers to adopt the more universal service for point-of-purchase transactions.

For me, this is one more example that Apple is missing out by not opening up its potential universe by licensing its operating system and opening up its platform.

My call for this battle for investor’s better returns is for Microsoft over Apple.