Apple, Inc. (AAPL) is the biggest technology company in the world, with a $2.41 trillion market capitalization as of July 7. AAPL crossed the $2 trillion mark  in August 2020, becoming the first U.S. based company in history to do so. Ranked #1 on the Forbes Top 100 Digital Companies in the world list and #3 on the Fortune 500 list, AAPL is one of the most valuable companies worldwide.

Software giant Microsoft Corporation (MSFT) crossed the $2 trillion market capitalization mark on June 22. The company’s continued dominance in the software and cloud computing space allowed it to double its market cap within two years, after hitting  the $1 trillion mark in 2019. MSFT is currently ranked #15 on the Fortune 500 list and #2 on the Forbes Top 100 Digital Companies list. It had a $2.11 trillion market capitalization as of July 7.

AAPL has gained 55.2% over the past year, while MSFT has returned 34.4% over this period. However, in terms of year-to-date performance, MSFT is the clear winner with 25.9% gains versus AAPL’s 9% returns. Shares of AAPL have surged 14.8% over the past month, surpassing MSFT’s 10.3%.

Click here to check out our Software Industry Report for 2021

But which stock is a better buy now? Let’s find out.

Latest Developments

On June 8, AAPL offered a preview of  new, powerful privacy protections in its operating systems that are designed to ensure better control and management of data. These updates reflect the company’s legacy of privacy leadership across the industry. Also on June 8,  the company unveiled new developer tools and technologies to help developers create user friendly and more engaging app experiences. As increasing numbers of developers sign up for these services, AAPL’s revenues from the “Service” segment is likely to rise substantially.

In May,  AAPL gave a $410 million advanced manufacturing award to leading optical technology producer II-VI. This investment is expected to accelerate II-VI’s  production capacity. The company  manufactures iPhone components. Furthermore,  II-VI’s laser products are expected to be a key raw material in AAPL’s LiDAR based electric vehicles.

MSFT is currently gearing up to launch Windows 11, its major software update since 2015. The latest operating system is designed to compete with AAPL’s operating systems. Scheduled to launch by the end of this year, the product  should boost MSFT’s software sales significantly in the coming months and is expected to become a major competitor  to macOS.

MSFT’s cloud services software Azure has been gaining traction over the past year, with several blue-chip companies deploying Microsoft Azure technologies to facilitate their  cloud operations. MSFT has signed  deals with telecom giant AT&T, Inc. (T), Morgan Stanley (MS) and Mars Incorporated over the past couple of months. The company collaborated with MicroFocus International in May to deliver cloud and digital transformation services to government agencies.

Recent Financial Results

MSFT’s revenues increased 19% year-over-year to $41.70 billion in its  fiscal third quarter, ended March 31, 2021. Its operating income came in at $17 billion, up 31% from the same period last year. Its non-GAAP net income improved 38% from the prior year quarter to $14.80 billion. And its non-GAAP EPS stood at $1.95, indicating a 39% rise from the year-ago value.

For the fiscal second quarter, ended March 27, AAPL’s revenues increased 53.6% year-over-year to $89.58 billion. This can be attributed to a 61.6% rise in ‘Product’ revenues to $72.68 billion, driven by record Mac sales over this period. Its operating income and net income improved 114% and 110.1%, respectively, from the same period last year to $27.50 billion and $23.63 billion. And its  EPS came in at $1.40, reflecting an 118.8% rise from the prior year quarter.

Past and Expected Financial Performance

MSFT’s revenues and net income increased at 14.8% and 52.6% CAGRs, respectively,  over the past three years. The company’s EPS rose at a 53.7% CAGR 53.7% over the past three years, while its tangible book value increased 29.7% over this period.

In comparison,  AAPL’s revenues and net income rose at CAGRs of 9.6% and 12.7%, respectively, over the past three years. Its EPS increased at a 19.8% CAGR  over the past three years, while tangible book value declined at a rate of 18.3% per annum over this period.

Analysts expect MSFT’s revenues to rise 16% in its fiscal fourth quarter (ended June 2021), 16.2% in the current year, and 12.3% next year. Consensus EPS estimates indicate a 30.1% improvement year-over-year in the about-to-be reported quarter, 34.9% in  2021, and 7.7% in 2022.

In comparison, AAPL’s revenue is expected to rise 22.2% in the most recent quarter (ended June 2021), 29.2% in  2021, and 4% in 2022. The Street expects the company’s EPS to rise 56.2% in its  fiscal third quarter, 57.9% in the current  year, and 3.1% next year.

Both  companies surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.

Profitability

AAPL’s trailing-12-month revenue is 2.03 times MSFT’s. However, MSFT is more profitable, with a 68.38% gross profit margin versus AAPL’s 39.88%.

Also, MSFT’s 47.25% and 35.02% respective  EBITDA margin and net income margin are significantly higher than AAPL’s 30.68% and 23.45%.

Thus, MSFT is the more profitable stock here.

Valuation

In terms of non-GAAP forward P/E, MSFT is currently trading at 36.03x, 28.9% higher than AAPL, which is currently trading at 27.96x.  MSFT’s 2.32 non-GAAP forward PEG  is 13.2% higher than AAPL’s 2.05.

Moreover, AAPL’s 7.42 and 23.80 respective trailing-12-month Price/Sales and Price/Cash flow multiples compare with MSFT’s 13.12 and 28.76.

Thus, AAPL is the more affordable stock here.

POWR Ratings

MSFT has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. AAPL, in comparison, has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

MSFT has a grade of B for Stability, consistent with its relatively low 0.79 beta. AAPL has a grade of C for Stability. This is justified, given its relatively high beta of 1.21.

Both the stocks have a B grade  for Quality, owing to their  higher-than-industry average profit margins. AAPL’s 23.45% net income margin  is 382.1% higher than the 4.86% industry average, while MSFT’s 35.02% net income margin is 619.8% higher than the industry average.

Of the 131 stocks in the Software – Application industry, MSFT is ranked #19. Comparatively, AAPL is ranked #24 of 45 stocks in the B-rated Technology – Hardware industry.

In addition to the grades highlighted, we have rated both the stocks for Value, Momentum, Growth, and Sentiment. Click here to view all MSFT ratings. Get all AAPL ratings here.

The Winner

Both AAPL and MSFT dominate their respective industries. However, MSFT is currently going the  extra mile to increase its market reach through latest product and service launches. Its Windows 11 is expected to be a major competitor to AAPL’s operating systems, particularly in terms of price. This, coupled with its higher profit margins, make MSFT a better buy.

Our research shows that odds of success increase when one invests in stocks with an overall POWR Rating of Strong Buy or Buy. Click here to view the top-rated stocks in the Software – Application industry. Also, get the top-rated stocks in the Technology – Hardware industry here.

AAPL shares were trading at $143.33 per share on Thursday afternoon, down $1.24 (-0.86%). Year-to-date, AAPL has gained 8.36%, versus a 16.04% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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