Last Updated on March 6, 2023 by Jonathon Weber
Some investors prefer to buy big companies, as their products are well-known, while their operations are often diversified across geographic markets and different products. Some of the biggest companies in today’s world are from the tech industry. In this report, we will compare and contrast two of the world’s largest companies and tech giants: Apple (AAPL) vs. Microsoft (MSFT) stock.
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Apple (AAPL) vs. Microsoft (MSFT) Stock
Both companies are tech heavyweights, but their business models are very different. Apple is a hardware-focused company, while Microsoft is a software-focused company. Apple generates the vast majority of its revenue from hardware product sales. This includes the iPhone, Apple’s most important product in terms of revenue, profit, and cash flow generation. Other important products from Apple are the iPad series, its Mac and MacBook series, and its Apple Watch series.
In total, Apple’s product sales contribute more than 80% of the company’s total revenues, while services contribute a little less than 20% of Apple’s revenue. Services revenue comes primarily from Apple’s take of App Store sales, while some subscription services also play a role, such as Apple’s streaming service.
The hardware-centric business model means that Apple is exposed to the economy’s strength. When consumers aren’t spending lots of money, Apple’s sales decline. This was visible in the company’s most recent quarterly results when revenue declined by 6% year over year as consumers that are hurt by inflation spend less on discretionary items.
Meanwhile, Microsoft’s software-centered business model is more resilient. Microsoft generates the vast majority of its revenue from subscription services to its software offerings, such as its operating system Windows or its business software suite Office, which includes Word, Excel, PowerPoint, and so on.
Consumers who use these products also want to use their PCs during recessions, and businesses need to use these programs and tools during good times and bad times. Demand is thus not very cyclical. As a result, the subscription model guarantees that Microsoft makes money from existing users for as long as they use Microsoft’s products, and revenues are very foreseeable.
Not surprisingly, this has resulted in a very resilient revenue stream for Microsoft, which is why the company saw its revenue grow slightly during the most recent quarter while many other tech companies, including Apple, saw their sales decline. It is worth noting that adverse currency rate movements negatively impacted both Apple and Microsoft during the quarter due to the U.S. dollar’s strengthening over the last year.
Comparing Apple vs. Microsoft, both have been substantial growth investments in the past. This holds true for their business growth rate, their earnings-per-share growth, and especially for the total returns they have delivered. In the future, both companies should also deliver solid underlying growth, although likely not at the rate seen over the last decade.
Maintaining high growth rates becomes increasingly challenging the larger a company becomes. Since Microsoft and Apple have turned into absolute giants over the last decade, their future relative growth rate will likely not be as exceptional as it was in the past.
We believe that Microsoft will nevertheless generate a still compelling earnings-per-share growth rate of 10% over the next five years. Several contributing factors will drive this. First, some growth can be expected for its core businesses, such as Windows and Office. On top of that, Microsoft has experienced compelling growth in cloud computing via its Azure platform.
Since Microsoft has a solid balance sheet, inorganic growth via M&A is also possible. Right now, the company is seeking to close the proposed acquisition of gaming company Activision Blizzard (ATVI), which would expand Microsoft’s gaming business, mainly focused on the Xbox platform for now.
Last but not least, Microsoft has been reducing its share count over time via share repurchases. We believe the same will hold going forward, increasing each remaining share’s portion of the company-wide net profits.
We believe Apple will deliver solid but less pronounced growth in the coming years. We are forecasting an earnings-per-share growth rate of 7% for Apple. This is because its most important businesses, such as the iPhone, are relatively mature already. Hence smartphones are not a significant growth market any longer.
Due to some price increases, the rollout of new products, and due to growing services revenues, Apple will generate some business growth in the long run. In addition, the company has lowered its share count meaningfully in the past, and this will remain a major source of earnings-per-share increases in the coming years.
In the competition between Microsoft vs. Apple, they offer very secure and growing dividends, but their dividend yields could be higher. For example, Microsoft’s dividend yield is 1.1% right now, while Apple provides a dividend yield of 0.6% at the current price.
Regarding the respective dividend growth track record of the two tech companies, Microsoft outperforms Apple as well, as it has increased its payout for 21 years in a row, while Apple has increased its dividend every year for ten years. Hence, Microsoft and Apple are both Dividend Contenders.
Due to a more defensive, resilient business model, a higher dividend yield, and a better dividend growth track record, Microsoft looks like a better income investment, at least right now. That being said, its yield is lower than that of the broad market and possibly too low for many income investors.
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Based on our total return estimates, Microsoft looks more compelling than Apple today on a total return basis. We estimate that Microsoft will deliver total returns in the 10% range going forward, thanks to a forecasted 10% earnings-per-share growth rate, a 1.1% dividend yield, and a slight total return headwind from multiple compression, as we believe that Microsoft is currently trading slightly above fair value.
Our total return estimate for Apple is less favorable, however. Based on expected earnings-per-share growth of 7%, a dividend yield of 0.6%, and a mid-single-digit total return headwind from multiple compression, Apple is expected to deliver a low single-digit total return over the coming five years. Apple trades at a substantial premium versus our fair value estimate today, which impacts the total return estimate to a significant degree.
Better Choice: Microsoft vs. Apple Stock
Overall, Microsoft is the better choice among these two tech giants. It has better dividend properties and a more robust total return outlook, and its software/subscription-based business model is more resilient than the hardware-focused business model of Apple.
Disclosure: Members of the Sure Dividend team are long AAPL and MSFT.
You can also read 3 Best Buy and Hold Dividend Stocks for 2023 by the same authors.
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Jonathons Weber writes about value, dividend Investing, growth, and growth at a reasonable price equities. He writes extensively on Seeking Alpha and is also a member of the Sure Dividend team. According to TipRanks, Jonathan is among the top 1% of bloggers (as of July 24, 2022).