What Apple Inc. (AAPL) Can Learn From Microsoft Corporation (MSFT)

If Apple wants to return to its innovative ways, it likely could take from the Microsoft model in this way – slow down. Once a device is introduced, don’t put out a new version until it is truly a new version. Let the level of innovation dictate the production schedule. Apple has succeeded for 30 years because it has been different from Microsoft Corporation (NASDAQ:MSFT) in the ways Satell wrote – but it was successful like Microsoft due to the similarity in focus on innovation. When Apple diverged from that, it lost its edge.

An investor’s comparison

From a valuation standpoint, both Microsoft and Apple are cheap, especially when compared to close competitor Google Inc (NASDAQ:GOOG). Google Inc (NASDAQ:GOOG) trades at a forward P/E in the mid 14-range, with a PEG of 1.6. Apple, on the other hand is nearly half as expensive, sporting a PEG of 0.5, despite the fact that Wall Street’s growth estimates are more optimistic.

Top-tier analysts expect Apple Inc. (NASDAQ:AAPL) to generate annual EPS growth of 18.9% over the next five years; Google’s estimate is near 15%, while most expect Microsoft to come in around 9% a year. This differential is very important, because it’s clear that investors expect Apple to generate growth in the range between Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT), which trades at a PEG of 1.7—rather than what the Street expects.

A divergence no one talks about

Now, this is a divergence in opinions between mainstream investors and Wall Street analysts; but it’s the fundamental basis for Apple’s seemingly low valuation, and is a story that’s not discussed often enough. Only time will tell which side will win, but if the aggregate market is correct in surmising that Apple will grow less than most expect then its valuation metrics aren’t really that cheap after all.

With recent reports that a key Apple Inc. (NASDAQ:AAPL) supplier is becoming more bearish, along with forecasts of a monumental drop in iPad Mini sales this coming quarter, it’s crucial for value investors to at least understand that their underlying growth estimates may be too optimistic.

Questions, comments

What are your thoughts about Apple as it compares to Microsoft Corporation (NASDAQ:MSFT), and where do you see it going from here? Do you think Apple should heed any of this advice and be willing to adapt? Let us know your thoughts in the comments section below.

The article What Apple Can Learn From Microsoft originally appeared on Fool.com and is written by Jake Mann.

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