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 Click to see monthly returns in table format!

Lists

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

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!