Sell Apple Stock to Buy Microsoft?

The technology sector has not been immune to the current Coronavirus crisis, although technology majors have fared somewhat better than the broader markets.  Apple stock (NASDAQ:AAPL) has declined by close to -20% since early February after the WHO declared the Coronavirus a global health emergency, compared to a -12% decline for Microsoft stock. While both companies have seen a similar growth rate in revenues over the last 5 years (about 7.5% per year), with EPS also growing at similar levels (13%-14% per year), Microsoft’s relative valuation is slightly ahead of Apple’s with its P/E multiple standing at 27x vs. 19x. Overall, it’s likely that Microsoft stock will continue to outperform through the current crisis, considering that demand for its cloud and productivity software could hold up better compared to Apple, which is largely dependent on pricey hardware such as the iPhone.

Microsoft’s Revenues Should Hold Up Better Through This Crisis

Apple derives over 75% of its revenues selling increasingly expensive consumer electronics products, which could see sales decline in the event of a global recession, as discretionary spending falls. Microsoft, on the other hand, derives roughly 63% of its revenues from cloud computing and productivity-focused software, which could see demand hold up better compared to consumer hardware. In general, Cloud services and related software applications could see increased demand, as people work from home and spend more time on online meetings, children connect with schools via video conferencing and people generally have more screen time and less commute time.

View our complete dashboard analysis Is Apple Expensive Or Cheap After A -20% Move Vs. -12% For Microsoft? for more details on how Apple and Microsoft’s stock fared through the Coronavirus crisis, their relative valuations, as well as their financial performance over the last few years. Parts of this analysis are summarized below.

CORONAVIRUS CRISIS: Since early February, Apple Inc stock has declined -20% compared to -12% for Microsoft.

• Apple stock has declined by about -20% since early February, compared to -12% for Microsoft, after the WHO declared a global health emergency relating to the Coronavirus.

HISTORICAL PERFORMANCE: From 2009-2019 Apple Inc stock has grown at 1.8x the rate of Microsoft

• Apple Inc stock went from $26 at the end of 2009 to $293 at the end of 2019, representing a change of about 10x.
• During the same time period, Microsoft went from $24 to $157 representing a change of almost 6x.
• This implies that Apple stock grew at about 1.8x the rate of Microsoft.

ANALYSIS:

How do valuations for Apple and Microsoft compare, based on the review of fundamentals?

• P/E Ratio: Based on trailing 2019 P/E ratios, while Apple looks cheaper compared to Microsoft, it is more expensive than it has been historically.
• Apple Inc’s 2019 trailing P/E ratio of 24.5 is 0.8x that of the 2019 Microsoft P/E ratio of 30.8.

Historical Revenue and EPS Growth: Apple Inc stock looks slightly less attractive compared to Microsoft.

• Apple Inc 2014-19 annualized revenue growth of 7.3% is slightly below Microsoft’s 7.7% growth over the same period.
• Apple Inc 2014-19 annualized EPS growth of 13% compares with about 14% for Microsoft.

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