Microsoft’s Outlook May Improve Even if Economy Slows

In the battle between mega-cap technology stocks Apple (AAPL) and Microsoft (MSFT), Apple has been outperforming this year after it unveiled its new iPhone.  As a result, Apple is down only -18% this year, while Microsoft is down -26%. However, with consumer spending under threat from recession, some analysts believe Microsoft is ready to outperform. 

Although their valuations are similar, much of Microsoft’s almost $200 billion of annual revenue comes from providing essential software and services to businesses and consumers. Meanwhile, Apple’s revenue prospects are more tied to consumer spending, and it is exposed to markets in Europe and China.

Despite the plunge in the Nasdaq 100 Index ($IUXX) (QQQ) this year, the valuations of Microsoft and Apple remain expensive.  Both companies are hovering around 23 times estimated earnings for next year, in line with the Nasdaq 100 Index.  However, for Apple, that’s a hefty premium to its 10-year average of 16.9, while Microsoft is close to its long-term average of 21.7.

Microsoft also looks cheaper than Apple on another growth metric, the so-called PEG ratio, or the price-earnings multiple divided by the expected percentage increase in earnings. According to Bloomberg data, Microsoft’s PE is 1.7 times the forecast rate of profit growth, compared to 2.2 times for Apple.  Also, analysts estimate that Microsoft will report double-digit revenue growth over the next two years, while Apple’s growth is forecast to slow to 5% in the same period.

Concerns about the Chinese economy weigh more on the prospects of Apple than on Microsoft.  If the economic slowdown in China persists, Apple may be more at risk, given that it produces and sells iPhones in China.  Bloomberg Intelligence said, “Microsoft is better positioned to survive a recession and has lower exposure to China for assembly and sales than Apple.” 

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