Microsoft is a better stock buy than Apple? Puhleeze

Tue, Dec 7, 2010

Analysis, Featured, Finance, News

I thought Motley Fool was supposed to be a source of good investment advice, but if this article from Chris Baines is any indication, MF readers might as well divest immediately and either put their money under their mattresses or invest in magic beans.

Baines attempts, quite unsuccessfully, to articulate why Microsoft is a better buy right now than Apple – never mind the fact that Microsoft shares have been stagnating for years as MSFT shareholders continue to express disappointment and frustration. Apple’s stock price, meanwhile, has been on a meteoric rise over the past couple years and is now closing in on $325 a share. But I digress. Onto the “meat and potatoes.”

Baines oddly dismisses Apple’s penchant for customer care and writes that Apple isn’t as kind to its owners as it is to its consumers, whatever that means. Anywhoo, Baines comes out with this gem.

Like the cigarette companies, a truly great business can continue to succeed without having to reinvent the wheel. Microsoft fits the bill: Almost all of Microsoft’s profits come from virtual monopolies (such as Windows and Office) that are indispensible to business. Market share in Office Suites, for instance, exceeds 94%.

But if Apple were to stop innovating, customers (and shareholders) would drop them like a hot potato, because Apple faces fierce competition in its bailiwicks.

In the computer space, Apple faces lower-priced competitors from the likes of Sony and Hewlett-Packard.

Maybe Baines has been watching too much Mad Men (and I can’t fault him for that), but the cigarette business is not a growing business. And yes, Microsoft’s profits come from virtual monopolies, but those monopolies are weakening by the day. Microsoft’s cash cow rests solely on Windows and Office, and as alternatives to those titles continue to pick up steam, Microsoft and its shareholders will feel the burn. And more importantly, with over 94% of the market, where else is there for Microsoft to go but down? Stock growth is dependent on growing revenues not maintaining it. True, Microsoft has delivered solid earnings recently, but it’s days as the go-to company in tech is a thing of the past. Passively relying on monopolies for revenue can indeed generate profits for years on end, but it’s a long-term strategy doomed to fail – hence Microsoft’s numerous, and mostly unsuccessful, efforts to become a player in a myriad of markets from search to cloud services, and of course, smartphones.

As for Apple ceasing to innovate, well of course customers and shareholders would drop Apple shares as quickly as they could if that transpired. It’s like saying, “If Lebron James stops scoring points and stopped playing defense, the Miami Heat would drop him in a heartbeat.” Seriously, if Baines argument for buying Microsoft is that they can continue to make money while not innovating, I’ll take my chances with Apple.

Next, Baines invokes lower-priced competitors like Sony and HP. Sadly, this is an argument typically brought up but one that has never held much weight. There were always cheaper alternatives to the iPod and we all saw how that played out. And today there are cheaper alternatives to the iPhone, the iMac, the iPad etc. –  but cheaper doesn’t mean better, and Apple’s earnings performance over the past few years emphatically demonstrates that consumers are willing to pay a premium on hardware and software they deem to be of a higher quality.

Baines then write that Apple faces growing competition from RIM and Android. True, but Apple is more than holding its own, and with the bulk of Apple’s profits now derived from the iPhone, it’s companies like RIM and Microsoft that really have to worry about being left behind. Android, though, seems to be doing just fine.

Comically, Baines even writes that the iPod doesn’t have a stranglehold on consumers anymore since iTunes is now DRM free. Lord, is this even a point worth addressing? I think not.

So Apple must continue to innovate to fend off competitors, but history says that its odds of doing so indefinitely are next to none.

In consumer electronics, a competitor inevitably ends up building a better mousetrap, usually for cheaper. Just ask RCA about the TV, Sony about the Walkman, Motorola about the StarTac — followed by the Razr — and Apple itself about the Macintosh.

Will Apple be able to innovate and rule market after market in perpetuity? Of course not. But with Steve Jobs and co. at the helm, Apple has had a string of hits that have consistently left entire companies helpless to compete in a real and tangible way. Moreover, Apple’s innovations are real innovations with long shelf lives. Was the Motorola Razr really that revolutionary? A thin flip phone? Wow. The Walkman, the iPhone – now those are revolutionary innovations that influenced technology, and society at large, for years after their initial release. The scary thing is that the majority of folks these days still use feature phones. The room for growth ahead of Apple today is tremendous and the ride is just beginning. And all the while, the folks at Apple are working hard to create innovative products while many companies are merely waiting to see what Apple does next and devise their product roadmaps accordingly.

Successful companies lead. They’re at the forefront of technological innovation. Apple’s resume speaks for itself. Sure, Apple’s Mac OS was markedly superior to Windows back in the late 90’s and early 2000’s, but Apple lacked the leadership they now possess to actually get Macs into the hands of the masses. Steve Jobs and co. changed all that and Apple’s revenues, profits, and share price all reflect that.

They said Apple wouldn’t hit $100. Then they said it wouldn’t hit $200. Hitting $300? No f’n way the pundits claimed. With Apple now hovering in the $320 range, is $400 a possibility? Hell, seems like a good bet to me.


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2 Comments For This Post

  1. Fjord Prefect Says:

    Yes, Android has done well all year, but look at this:

    …and this…

    The cracks are starting to appear.

  2. Don108 Says:

    Your argument that Microsoft’s monopolies are weakening, while not incorrect, misses the point.

    The point is that Microsoft exists off of its monopolies. It has nowhere to go. If everyone drove a Ford, and if your Ford was working, you would have no reason to buy a new Ford.

    Microsoft loves talk about total sales, but it’s primarily to manufacturers (not to end users) so that people mainly get a new copy of Windows when they upgrade a computer. Office is so big and bloated and does so much that there is no reason for companies to upgrade to a newer version—except when they buy a new computer.

    Apple, meanwhile, owning such a small market share, could increase its market to companies and individuals many times over and still have an enormous market open to them. If they tripled their market share Microsoft would still have 50-55% of the market.

    Wise investors don’t buy based only on the past and present, they buy stock based on potential future. MSFT’s future is static. AAPL’s future is wide open.

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