Two titans of technology, both having excellent years in terms of stock performance. Apple Inc. (AAPL) is up 24.82% year to date, and Microsoft Corp. (MSFT) is up 24.46%.
Despite their nearly identical stock performance so far this year, how do the companies compare in terms of their earnings growth, expected earnings growth, sales growth, long-term returns, and current valuations?
One company has a better future outlook than the other.
Below are comparative fundamental and performance metrics for both companies.
These metrics are used based on comments from Tradequotex.com analyst Cory Mitchell.
He said, “Long-term stock performance is highly correlated to earnings growth. Rising earnings are correlated to higher stock prices.
“Expectations of high(er) future earnings are also correlated to higher stock prices. When it is expected that a company will be able to generate higher earnings in the future, the stock is generally bid up in anticipation of that.
Earnings expectations can lead to euphoric short-term stock rises, but unless the company actually delivers rising earnings, such stock gains are generally given back. Increasing sales is a secondary factor to consider, as rising earnings are best accompanied by rising revenues.”
Stock performance: AAPL vs MSFT
First, here’s how the stocks compare in terms of performance.
10-year Total Return, including dividends being reinvested
- AAPL: 1004.5%
- MSFT: 1214.4
5-Year Total Return, including dividends being reinvested
- AAPL: 379.8%
- MSFT: 258.3%
Over various recent time frames, sometimes MSFT has performed better, at other times AAPL has performed. Both have been very strong performers.
AAPL versus MSFT: Earnings and sales growth
Here is how earnings and sales growth rates compare between Apple and Microsoft.
5-Year Average Annual Earnings Increase (past five years)
- AAPL: 16.9% per year
- MSFT: 17.9% per year
Forecasted 5-Year Average Annual Earnings Increase (analyst expectations for the next five years)
- AAPL: 9.7% per year
- MSFT: 15% per year
5-Year Average Annual Revenue Increase (last five years)
- AAPL: 8% per year
- MSFT: 13.4% per year
For recent and forecasted earnings and sales growth, Microsoft has the edge over Apple. Microsoft is expected to grow earnings by approximately 50% more per year than Apple (15% versus 10%) over the next half-decade.
Which is the best value: MSFT or AAPL?
Apple is trading at a Price/Earnings (P/E) of 36.3 and a forward P/E of 34.6.
Microsoft is trading at a P/E of 40.4 and a forward P/E of 38.1.
On the surface, Apple looks like a better value, but recall that Microsoft is expected to have higher growth in the future.
PEG, or the P/E to Forward Growth ratio looks at expected earnings relative to the P/E ratio. The lower the value the better in terms of valuation.
Apple’s PEG is 4.1 and Microsoft’s is 2.6. This indicates that Microsoft is the better value.
Both companies are trading at very high valuations currently. A PEG value of 1 indicates the stock is trading near fair value. So both stocks are priced high for their expected growth, but Microsoft is priced more attractively than Apple.
Summary: Apple vs Microsoft
Both are great companies to own in a long-term portfolio. Both are expected to grow earnings in the future and have a strong track record of growing profits and sales in the past.
Microsoft is priced more attractively than Apple currently, mainly because Microsoft is expected to grow earnings by a higher yearly percentage over the next five years relative to Apple.
