All major cues suggest Microsoft Corporation (MSFT) has the momentum Vs Apple Inc. (AAPL). Here's why.
- Microsoft has a strong foothold in the enterprise markets.
- Cloud computing revenue is growing at a stratospheric rate.
- Apple hasn't established any forward-thinking growth drivers.
Between 2013 and 2015, there was growing sentiment among the press and consumers that Microsoft (NSDQ:MSFT) had lost it. Meanwhile, Apple Inc (NSDQ:AAPL) continued to break iPhone sales records, and Apple’s stock price continued to balloon based on the belief that the iPhone bubble could never burst.
Notably, over the past 12 months, Microsoft has shown that not only do they have the momentum as compared to Apple, but they are set to go back to heights reminiscent of the computer boom. Interestingly, despite the fact that Apple has enjoyed strong hardware sales, they haven’t been able to pivot and take advantage of growing economies. Here's why investment in MSFT stock could be better than AAPL stock now.
The fact remains that Microsoft still maintains a strong foothold on the enterprise and enjoys fruitful relationships with governments. For instance, Microsoft won a multi-billion dollar deal with the DOD (Department of Defense) in February 2016, and also secured another recently.
Moreover, despite growing competition and free alternatives, Microsoft’s Office division currently makes up ~38% of the estimated stock price, as per Trefis. Furthermore, Microsoft’s Azure revenue went up by a whopping 116% in Q1 FY 2017, and usage is doubling year-on-year. Cloud computing is a big growth driver, and Apple still isn’t well placed to capitalize on it, nor have we seen any indication of plans to venture into it.
As a matter of fact, Microsoft’s smartphones business isn’t performing well. Revenue was down by 71% in FY 17 Q1. However, Microsoft was able to balance this out with gains in other segments. Notably, future growth drivers aren’t going to come from hardware. This is exemplified by Apple’s earnings report for Q4 Fiscal 2016, which saw profit decline by 19% as compared to the same quarter last year.
It is worth noting that there is increasing competition from Chinese phone manufacturers, and they are shipping compelling devices. Some can be regarded as “cut-price iPhones”. Research by Morgan Stanley warns of a flooded smartphone market in 2017 from ambitious Chinese smartphone manufacturers. As a result, we might see a big decline in iPhone sales, especially in emerging markets and Asia.
Furthermore, as more computing services move to the cloud, smartphone specs have become less important. A smartphone from 3-4 years ago can still run most of the popular apps of today. The writing is on the wall and Apple has even introduced a yearly iPhone upgrade program in certain regions as a way of propping up their smartphone revenue figures. It doesn’t help that there is growing sentiment of stagnation towards Apple.
In fact, in press and investor circles, there is already a look towards the “iPhone 8” because the iPhone 7 series was so underwhelming. A removal of the headphone jack and a stubbornness to change the visual aesthetic left a bitter taste in consumer’s mouths. In an act of “divine intervention” Samsung’s problems with the Galaxy Note 7’s burnings issues has helped the sales of the iPhone 7. Things are likely to have been a lot different if that situation hadn’t occurred.
Microsoft has also been working hard in AR, and the Holo Lens continues to turn heads. In the near future, this is likely to be used in enterprise, education and the defense industry. The strong possibility of long-term growth in AR and cloud computing is what is making top investors excited. This is exemplified by the fact that a drop in phone revenue hasn’t affected the stock. In fact, Microsoft stock has strongly outperformed the Computer Software industry. This shows the value Microsoft holds.
Moving forward, Microsoft’s $26 billion acquisition of Linkedin is likely to play a big role with regard to growth. It enables them to tap into a growing professional social network. Notably, Linkedin also owns Lynda, and this enables Microsoft to tap into the rapidly growing professional education market. It is highly plausible that Lynda would become baked into Microsoft’s enterprise-grade software, enabling managers to train their staff at a lower cost.
In conclusion, Microsoft is making all the right moves at the right time. As compared to Apple, Microsoft is tapping into some very lucrative growth drivers. Cloud revenue is doubling year-on-year and their AR offering has limitless possibilities. Sure, Apple is likely to enjoy a strong Q4 2016 due to Christmas sales; however, the days of record-breaking iPhone sales are numbered. Mac and iPad sales are already declining.
The fact is Apple needs a forward focused growth driver, and fast. Microsoft has already struck them and has the stronger momentum at this moment in time. It is worth adding MSFT to your portfolio in order to benefit from this momentum.
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