With a market cap of $2.37 trillion, tech giant Microsoft Corporation (MSFT - Get Rating) in Redmond, Wash., develops, licenses, and supports software, services, devices, and solutions worldwide. Its offerings range from Microsoft Teams, Office 365 Security, and Compliance to Xbox hardware and Xbox content and services in the gaming segment. In comparison, one of the most popular tech companies, Apple Inc. (AAPL - Get Rating) in Cupertino, Calif., is known for its innovative products, such as iPhones. In addition, the company offers various services, such as Apple Arcade, Apple Music, Apple News+ and Apple TV+. It has a market capitalization of $2.92 trillion.

Concerns surrounding high oil prices amid fears of supply disruptions and the possibility of aggressive interest rate hikes have raised questions about the stock market’s stability. After announcing its first-rate hike in more than three years, the Federal Reserve is expected to get more aggressive with interest rate increases to fight inflation. Amid this environment, it could be wise to invest in mega-cap stocks because of their companies’ impressive market dominance and solid long-term growth prospects. So, both MSFT and AAPL could generate steady returns in the long term.

AAPL stock has gained 6.4% in price over the past month, while MSFT returned 4%. Also, AAPL’s 23.7% gain over the past six months is significantly higher than MSFT’s 9.6% returns. Furthermore, in terms of past years’ performance, AAPL is the clear winner with 44.9% gains versus MSFT’s 31.4% returns.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Jan. 18, 2022, MSFT announced plans to acquire troubled video game company Activision Blizzard Inc. (ATVI). The acquisition should accelerate MSFT’s gaming business growth across mobile, PC, console, and cloud and provide building blocks for the metaverse.

On January 27, 2022, Apple’s board of directors declared a cash dividend of $0.22 per share of the company’s common stock. The dividend is payable on Feb. 10, 2022, to shareholders of record as of the close of business on Feb. 7, 2022.

Recent Financial Results

MSFT’s revenue increased 20% year-over-year to $51.70 billion for its fiscal second quarter, ended Dec. 31, 2021. The company’s operating income grew 24% year-over-year to $22.20 billion, while its net income came in at $18.80 billion representing a 21% year-over-year increase. Also, its EPS was  $2.48, up 22% year-over-year.

AAPL’s net sales increased 11.2% year-over-year to $123.95 billion for its fiscal first quarter, ended Dec. 25, 2021. Its operating income grew 23.7% year-over-year to $41.49 billion. Its net income increased 20.4% year-over-year to $34.63 billion. Also, its EPS came in at $2.10, up 25% year-over-year.

Past and Expected Financial Performance

MSFT’s revenue and EPS have grown at CAGRs of 16% and 29.6%, respectively, over the past three years. Analysts expect MSFT’s revenue to increase 18.4% in the current year and 14% next year. The company’s EPS is expected to grow 16% in the current year and 15.1% next year. Also,  its EPS is expected to grow 17.4% per annum over the next five years.

In comparison,  AAPL’s revenue and EPS have grown at CAGRs of 13.1% and 25.7%, respectively, over the past three years. The company’s revenue is expected to increase 8.2% in the current year and 5.6% next year. Its EPS is expected to grow 9.8% in the current year and 6.5% next year. Also, AAPL’s EPS is expected to grow at 14.9% per annum over the next five years.

Profitability

AAPL’s trailing-12-month revenue is 2.05 times what MSFT generates. However, MSFT is relatively more profitable, with a gross profit and net income margin of 68.83% and 38.50%, respectively, compared to AAPL’s 43.02% and 26.58%.

However, AAPL’s 145.57%, 19.87%, and 37.86% respective ROE, ROA, and ROTC are higher than MSFT’s 49.05%, 15.25%, and 21.68%.

Valuation

In terms of forward non-GAAP P/E, MSFT is currently trading at 32.92x, which is 15.5% higher than AAPL’s 28.51x. And MSFT’s 22.72x forward EV/EBITDA is 7.8% higher than AAPL’s 21.08x.

So, AAPL is the more affordable stock.

POWR Ratings

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

MSFT has an A grade for Sentiment, which is consistent with analysts’ expectations that its EPS and revenue will increase in the coming months. In comparison, AAPL has a B grade for Sentiment.

MSFT also has a B grade for Stability, which is in sync with its 0.91  beta. In comparison, AAPL has a C grade for Stability, which is consistent with its 1.19  beta.

Of the 162 stocks in the Software – Application industry, MSFT is ranked #20. However, AAPL is ranked #21 out of 45 stocks in the Technology – Hardware industry.

Beyond what I have stated above, we have also rated the stocks for Quality, Growth, Value, and Momentum. Click here to view all the MSFT ratings. Also, get all the AAPL ratings here.

Note that MSFT is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.

Click here to check out our Software Industry Report for 2022

The Winner

Both MSFT and AAPL are top mega-cap stocks and enjoy immense investor attention, given their solid growth prospects and industry-leading positions. However, even though both stocks are expected to gain in the long run, it is better to bet on MSFT now because of its better stability and impressive growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Software – Application industry here. Also, click here to access all the top-rated stocks in the Technology – Hardware industry.

MSFT shares were trading at $312.82 per share on Wednesday afternoon, down $2.59 (-0.82%). Year-to-date, MSFT has declined -6.80%, versus a -3.51% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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