After Apple (NASDAQ: AAPL) stocks have fallen sharply from their peaks following disappointing forecasts and negative supply chain data points around its latest iPhone, Apple and software giant Microsoft (NASDAQ: MSFT) are now struggling with the title of the largest publicly traded company by market capitalization.
Interestingly, if investors think that these two companies are worth much the same thing, Microsoft's shares are trading at just under 25 times the expected profits in FY 2019, while Apple is trading at less than 13.4 times what analysts think it will generate. FY 2019. In other words: Apple is making more money than Microsoft, but investors are willing to pay more for every dollar of Microsoft profit than for Apple.
I would like to propose here two reasons why Microsoft indeed deserves a richer valuation than that of Apple.
Microsoft is a more diversified company
Microsoft is a diversified company. It is the leading provider of PC operating systems; it dominates the productivity software market with its Office products; it's a major player in the game with its Xbox franchise; it operates an extremely efficient cloud computing company; and more.
The software giant brings together its different product lines into three segments: "more personal computing", "smart cloud", and productivity and business processes. These segments accounted for 38.3%, 29.2% and 32.5% of the Company's business and recorded sales growth of 8%, 18% and 20%, respectively, during the fiscal year. 2018 of the company.
Not only are Microsoft's businesses diversified, but each of its reporting segments performed well last year. Society is anything but a pony ride.
Apple, by contrast, derives a significant percentage of its sales – about 62.8% for the 2018 fiscal year – from its iPhone product line. When this business is doing well, as in fiscal year 2018, the business can generate significant revenue and profit growth. However, if this activity falls flat – and reports on iPhone production decline, with the 3D sensor chip vendor LumentumThe recent drastic downward revision of forecasts of less than two weeks after the initial forecast is not a positive sign. Any activity of Apple could suffer.
Now, to be fair, Apple does not only sell the iPhone. It has a fast-growing service business and a booming business based on the success of products like Apple Watch and AirPods. However, in total, these activities accounted for only about 20.5% of the company's sales for the 2018 fiscal year; it is therefore difficult for a robust growth to offset, for example, a product cycle for fictitious iPhone.
Apple also sells Mac personal computers and iPad tablets, but these companies are not huge and are not real superstars either. Apple's Mac business accounted for about 9.6% of its total business and had shrunk by 1% during the 2018 fiscal year. The iPad was even less relevant, accounting for just under 7.1% of sales; she also suffered a 2% drop in her income that year. This is not the kind of business that will encourage investors to pay a premium for shares.
The battle of growth rates
Another thing to consider is that, according to analysts' estimates, Microsoft is expected to generate much stronger growth than Apple in the next few years.
According to these estimates, Microsoft should increase its sales by 12.7% in its 2019 fiscal year, then by 10.6% in 2020. In contrast, Apple's sales are expected to increase by only 5.2% in fiscal year 2019, followed by a further 4.2% increase in its business figure. year 2020.
Now analysts' estimates are likely to change as more data points arrive, but for the moment, analysts are of the opinion that Microsoft is on the path to more robust growth than Apple over the next two years. If you take analysts' estimates as an approximation of the general expectations of investors, it is not surprising that Microsoft orders a richer multiple than Apple's.
Teresa Kersten, a LinkedIn employee, a subsidiary of Microsoft, is a board member of The Motley Fool. Ashraf Eassa does not hold any of the shares mentioned. The Motley Fool owns shares and recommends Apple. The Motley Fool owns shares in Microsoft and offers the following options: $ 150 long calls on Apple for January 2020 and $ 155 short calls on Apple, January 2020 Motley Fool has a disclosure policy.