How Does Microsoft Need To Do Vs. Apple Inc (NASDAQ:AAPL)?

It’s a special time of the software cycle for Microsoft Corporation (NASDAQ:MSFT): new versions of Windows and Office are set to roll out, and while the company has survived disastrous Windows editions in the past it feels as if Windows 8 is particularly important in terms of establishing Windows as an operating system for tablets (as well as, of course, generating sales from the core PC user base). On top of that, Microsoft (possibly because it was frustrated with the slow pace of other hardware manufacturers) is introducing Surface, a tablet of its own which is conceptualized as being more for business use. For example, the signature keyboard cover is intended to appeal to professionals who even on the go will do more typing than Angry Birds.

Microsoft’s most recent quarter, the first of its fiscal year, saw an 8% decline in revenue from a year ago, which might not be quite as bad as it appears since many potential customers may have put off making purchases until Windows 8 is released. Microsoft’s costs grew- including costs of goods sold, even though sales had been down- and earnings per share for the quarter came in at 53 cents, compared to 68 cents in the first quarter of the last fiscal year. Microsoft Corporation trades at only 10 times expected earnings for this year (and only 14 times an annualization of last quarter, which we’ve acknowledged may have been abnormally low). It looks to us like the market is pricing the stock fairly cheaply, as a standard run rate would provide higher earnings and there should be a kick to net income over the course of the year.

Ken Fisher FISHER ASSET MANAGEMENT

Billionaire Ken Fisher’s Fisher Asset Management is one of the major holders of Microsoft Corporation stock tracked in our database of 13F filings. The fund reported a position of about 18 million shares at the end of June (find more stocks owned by Fisher Asset Management). Renaissance Technologies, which was founded by now-billionaire Jim Simons, nearly doubled its stake during the second quarter to a total of about 16 million shares (see more stock picks from Renaissance Technologies).

Microsoft’s closest competitors are Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG). Read our latest analysis of Apple. Apple’s share price has been dropping recently, so much so that it now trades at a trailing P/E of only 12. With Wall Street analysts expecting some degree of the company’s recent growth rates- earnings last quarter were up over 20% from the same period in 2011- the five-year PEG ratio is 0.5 for what everyone acknowledges is a power player in tablets and smartphones. Microsoft may be cheap, but we think that Apple is an even better buy. Google is probably a stock to hold off on for now, however: it hasn’t been too successful at integrating Motorola Mobility Holdings, and earnings are down as that business remains unprofitable. Analyst expectations are that the company will improve in 2013, and it trades at 14 times consensus earnings, yet we think Microsoft and Apple look like better buys right now.

Oracle Corporation (NASDAQ:ORCL) and Amazon.com, Inc. (NASDAQ:AMZN) are also peers for Microsoft’s business software and tablet offerings, respectively. Oracle looks like another potential value play, as it carries trailing and forward P/E multiples of 15 and 10 respectively and has been getting moderate growth in net income. We think that we might take a closer look at that company. Amazon, meanwhile, continues to trade at a valuation of about $100 billion despite being barely profitable; even on a forward basis, its P/E is over 100 and those estimates incorporate assumptions of very strong growth. We think that stock is overvalued, and would consider shorting it against a long position in Apple or Microsoft.

Microsoft’s new product launches are a risk, but based on its valuation the market seems to have low expectations for the business’s performance over the next year. If the company looks like it can hit the Street’s earnings target, that would probably make the stock a buy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!