Apple (AAPL 1.51%) and Microsoft (MSFT 0.98%) were once considered the aging dinosaurs of the tech sector, but both companies have been reborn under visionary leaders. Steve Jobs’ return to Apple in 1997 led to the introduction of innovative new products — including the iMac, iPod, iPhone, and iPad — that turned the company back into a high-growth business. Apple’s future looked bleak after Jobs’ death in 2011, but the company continued to grow under Tim Cook, who oversaw the expansion of its business with new devices like the Apple Watch and AirPods, as well as sticky subscription-based services like Apple Music and Apple TV+.
Satya Nadella took the helm as Microsoft’s third CEO in 2014 and implemented a “mobile first, cloud first” strategy to reduce dependency on desktop software. Under Nadella, Microsoft transformed most of its flagship software into subscription-based cloud services and cross-platform mobile apps, grew Azure into the world’s second-largest cloud platform, and strengthened its hardware business with new Surface devices and Xbox consoles.
Over the past 10 years, Apple has delivered nearly 580% total returns, while Microsoft has delivered an even higher total return of more than 760%. These two blue-chip tech stocks are still solid long-term investments — but are either of them a better buy in this brutal bear market?
The differences between Apple and Microsoft
Apple derives most of its revenue from hardware devices, but Microsoft derives most of its revenue from software and cloud-based services. In the first half of fiscal 2022 (which began last September), Apple generated 55% of its revenue from iPhones, 10% from Macs, 7% from iPads, and another 11% from the wearables, home, and accessories segment. The remaining 18% of revenue came from the services segment, which includes the App Store, Apple Pay, and subscription-based services.
Microsoft splits its sprawling business into three main segments: Productivity and Business Processes (32% of revenue in the first nine months of fiscal 2022, which began last July), which houses Office, Dynamics, and LinkedIn; intelligent cloud (37% of revenue), which manages Azure and its server products; and more personal computing (31% of revenue), which includes its Windows, Xbox, Surface, search, and advertising businesses.
Which company generates more consistent growth?
Apple’s dependence on the iPhone makes it a more cyclical company than Microsoft. Apple’s iPhone sales rose 39% in fiscal 2021 after the company launched the iPhone 12, the company’s first family of 5G devices, but now the iPhone 13 is facing a much tougher year-over-year Compare vs. Chip shortages and supply chain disruptions are also exacerbating this slowdown.
However, Apple’s Services segment is growing like a weed. The company signed up 825 million paid subscriptions across all its services in the second quarter of 2022, up from 165 million over the last 12 months.
Wall Street expects Apple’s sales and earnings to grow 8% and 9%, respectively, this year. In 2023, they expect sales and earnings to grow 5% and 6%, respectively, but that doesn’t fully account for potential launches of new augmented reality devices or additional subscription services.
Microsoft’s business is more diversified and less cyclical than Apple’s, but it depends heavily on the continued growth of its overall cloud business — which grew its revenue by 32% year over year in the third quarter of fiscal 2022 and accounted for nearly half of revenue Microsoft mattered.
Azure is the key growth engine of this segment and should remain a convincing alternative to the market leader, Amazon Web Services (AWS) for businesses (particularly retailers) that don’t want to feed Amazon’s most profitable business.
Analysts expect Microsoft’s revenue and earnings to grow 18% and 16%, respectively, in fiscal 2022. They expect steady growth to continue into fiscal 2023, as revenue rises 14% and earnings rise another 15%.
The reviews and verdict
Apple trades at 23 times forward earnings and pays a 0.6% expected dividend yield. Microsoft has a price-to-earnings ratio of 25 and pays a slightly higher dividend yield of 1%.
Apple has become a safe haven stock as interest rates have risen as it is firmly profitable and sits on $193 billion in cash and marketable securities, but it has arguably been a bit overvalued relative to its near-term growth prospects. Microsoft has also earned a reputation as a safe haven, sitting on $105 billion in cash, cash equivalents and short-term investments last quarter, but much of that money has already been spent on its proposed purchase of Activision Blizzard for $68.7 billion.
Nonetheless, Microsoft arguably faces less macroeconomic headwinds than Apple, it pays a higher dividend, and its stock appears more reasonably valued relative to its near-term growth. If I could pick just one of these stocks now in this choppy market, I’d definitely stick with Microsoft.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions at Amazon and Apple. The Motley Fool has positions in and recommends Activision Blizzard, Amazon, Apple, and Microsoft. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.