Wednesday, April 17, 2013

Apple versus Microsoft

            I keep hearing that the PC is dead.  The future is tablets, phones, glasses, watches and the like.  Microsoft is toast.  Apple is the future.  Well not so fast – at least as far as the stock market is concerned.  It turns out that the market is a significantly more bullish on Microsoft than Apple (though it is bearish on both).  If that surprises you, let’s do the numbers.  What we really need to compare are the values of the competing business operations.  The table presents the calculation of those values.

(in billions) Apple Microsoft
Current Market Capitalization 378 241
 + Total debt 0 12
 - Cash and investments 140 70
 = Value of operations 238 183

2012 Earnings 41.7 17
Value of operations/2012 Earnings 5.71 10.76

Starting from the market capitalization, the value of operations is calculated by adding back any debt used to finance the company and subtracting out holdings of cash and investments that are not part of operations. 
            The calculation reveals that the operating values of the two companies are not that different  - $238 billion for Apple versus $183 billion for Microsoft.  But the earnings are vastly different.  Apple’s 2012 earnings of $41.7 billion were almost 2.5 times greater than Microsoft’s earnings of $17 billion.  Consequently, for the two values to be approximately equal the market must be placing a much greater operations multiple on Microsoft than Apple - the table shows it does.  Because the primary determinant of the multiple is future long-run growth, the analysis reveals that the market is much more pessimistic as regards Apple than Microsoft.  The market is saying that if Microsoft is dying, Apple is moribund.

1 comment:

Yifei said...

Thanks for this insightful analysis. Here comes my tentative explanation: Investors believe the business of Apple is more volatile than Microsoft-- consider the case of Nokia and Blackberry, which were quite strong but their relative strength in market changed dramatically in the past. Also, Microsoft's status in its industry is more stable than Apple's (Microsoft seems not have challengers as significant as Samsung for Apple). Thus, it is reasonable to think Microsoft's current earning is more sustainable than Apple's.