Two of the most well-known companies in tech are Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). Apple is famous for virtually creating the smartphone as we know it today, and is also a leader in both tablets and computers, as well as in wearables with its highly successful Apple Watch product line.
Microsoft is a software behemoth that dominates the market for PC operating systems and productivity software, and is a powerful player in the gaming and cloud computing markets. And, for good measure, Microsoft has built out a sizable consumer devices business, too, with its Surface line of computers.
If you’re an investor looking to add a large and powerful tech company to your portfolio and you’re trying to pick between Apple and Microsoft, I’d argue that, today, Microsoft is the better bet. Here’s why.
Microsoft has done an incredible job of delivering solid growth for shareholders. Last quarter, for example, the company reported year-over-year revenue growth of 12%, with operating income rising 18% during that same time frame.
That growth was broad-based, too. The company’s productivity and business processes segment saw sales increase 13%, its intelligent cloud segment enjoyed a 20% jump, and even its more personal computing segment — which has heavy exposure to the relatively uninspiring PC market — grew 7% as its search advertising, gaming, Surface, and Windows Commercial products grew enough to offset a 5% drop in Windows OEM sales.
Microsoft is also calling for revenue between $29.4 billion and $30.1 billion for the quarter — up 11% year over year at the midpoint of that range.
Apple, on the other hand, isn’t a growth company right now. In its most recent quarter, the company reported a 5% year-over-year decline in revenue. For the following quarter, Apple is guiding to revenue of between $55 billion and $59 billion. At the midpoint of that range, the company’s sales look set to drop 6.7% from the same quarter a year ago. For the full year, analysts expect Apple’s revenue to fall 3.9%, suggesting moderating declines in the second half of the company’s fiscal year.
In the subsequent year, analysts expect Apple to turn in revenue growth of 3.9%, but that utterly pales to the 10.4% growth that analysts forecast from Microsoft in its fiscal 2020.
Microsoft seems like a better stock for growth-oriented investors than Apple.
Better risk profile
Microsoft’s business is far more diversified than Apple’s. While Microsoft has roughly even exposure across its three core reporting segments (and there’s a lot of diversity within those reporting segments), Apple’s business is highly dependent on a single product category: iPhone.
For some perspective, nearly 63% of Apple’s revenue in fiscal 2018 came from sales of the iPhone. By contrast, Microsoft’s largest segment in fiscal 2018 — more personal computing — made up only 38.3% of the company’s overall revenue. It’s also worth noting that this segment consists of a broad spectrum of products.
To make matters worse, Apple’s iPhone business is currently tanking. Last quarter, iPhone revenue dropped 15%. Moreover, in addition to the fact that the company’s outlook for the current quarter is fairly weak, there has been a flurry of negative news items regarding iPhone demand, particularly in China.
As my Fool.com colleague Evan Niu pointed out, analysts with Longbow Research found that iPhone search trends in China — a potential indicator of demand — “fell a gut-wrenching 47% in February.”
Longbow also cited weak Apple supplier sales results in February as another sign that iPhone demand just isn’t great.
So on one hand, Microsoft has a collection of businesses that, in aggregate, are delivering significant and seemingly sustainable growth. On the other, Apple’s biggest business is declining and its other segments simply aren’t able to completely pick up the slack.
As far as risk profile goes, Microsoft seems like the safer pick.
A key advantage in favor of Apple
While I think Microsoft’s growth prospects and overall risk profile are better, there is an area in which Apple clearly wins: sheer profitability.
Although both Apple and Microsoft command roughly similar market capitalizations (Microsoft is actually a little more valuable than Apple as of this writing), Apple generated almost $68 billion in operating income over the last 12 months, dwarfing Microsoft’s nearly $38.9 billion over that same period.
Now, again, Microsoft’s growth trajectory looks healthier than Apple’s at the moment, so I expect that gap to narrow over the next couple of years. But, in the here and now, investors are paying significantly more for each dollar of Microsoft’s operating income than they are for a dollar of Apple’s at current prices.
Currently, Microsoft stock looks like a better bet than Apple’s. Microsoft’s business is more diversified and is set to grow at a significantly faster pace than Apple’s is over the next couple of years.
With that being said, if Apple’s iPhone business gets back on a sustainable growth track — even if that growth isn’t massive — and if the company’s other segments continue to collectively grow nicely, then I’d be more than willing to re-evaluate my stance on this comparison.