Better Buy: Apple Inc. vs. Microsoft

For many years, a bitter rivalry -- arguably the most bitter in all of business at the time -- defined the relationship between tech giants Apple (AAPL -1.14%) and Microsoft (MSFT -1.28%). Today, as their businesses have evolved, Apple and Microsoft still compete, but on less aggressive terms.

Microsoft remains rooted in its PC-era profit machine while also positioning itself to serve a similar role as a leading software provider for the cloud-computing era. Meanwhile, Apple has had legendary success in mobile computing.

Which of these mature companies is the more attractive to own? Let's run Apple and Microsoft through a three-part analysis to gauge which tech giant appears more deserving of investors' attention.

Financial fortitude

Apple and Microsoft each have their financial houses in order. Consider these four popular measurements of solvency and liquidity:

Data sources: Apple and Microsoft investor relations, Yahoo! Finance. 

It's a testament to the scope of Apple's operations that it can put Microsoft's $35.6 billion net-cash balance to shame. This first category isn't a fair fight for Microsoft, given Apple's status as the most profitable and largest company in the world. With more than twice the net cash as Microsoft and nearly double the cash-flow generation, Apple is the hands-down winner.

Winner: Apple.

Durable competitive advantage

Microsoft and Apple both have considerable competitive advantages, albeit in different ways.

Apple's dominant business model lies in its "walled garden" approach to consumer experiences. The company creates a compelling end-to-end experience by excelling at software development, hardware engineering, and design. When combined with its powerful app ecosystem and world-class marketing,  Apple is able to command significant profits per device in an industry where doing so is not the norm.

For example, smartphones powered by Alphabet's Android mobile OS commanded an estimated average selling price (ASP) of $217 in 2016,  according to researcher IDC. Apple, meanwhile, had a far higher $645 ASP  for the iPhone for its fiscal 2016. More impressive still, Apple could further increase its iPhone ASP if it aggressively prices its forthcoming iPhone 8, as some have speculated it will. 

Apple's ability to consistently create unique and compelling user experiences across all aspects of its devices is what powers the tech giant's profit machine. Consumers wouldn't be paying such dramatic premiums for Apple products unless they were getting a substantial benefit. 

Image source: Apple

Microsoft's competitive advantage, on the other hand, lies far more in its PC-era platform status than in any of its more recent accomplishments. Its two best-known products, Windows and Office, alone generated $38.2 billion of Microsoft's $91.9 billion in fiscal 2016 sales, after adjusting for the effect of deferred revenue from Windows 10. Office alone is rumored to drive 50% to 60% of Microsoft's operating profits, though the company doesn't divulge the figure. 

Beyond its legacy products, Microsoft continues to make strides in its cloud-computing division. Cloud sales rose to $25 billion last year, and its intelligent-cloud division produced $9 billion in operating income. As other cloud leaders, such as Amazon.com, are demonstrating, this market should continue to expand dramatically over the coming years, and Microsoft appears well situated to establish a meaningful share of the market, augmenting its cash-cow software platforms over the long term.

Winner: Tie.

Valuation

Despite being mature companies, both have outperformed the Nasdaq Composite over the past year. Apple and Microsoft stocks have risen 58.3% and 39.9%, respectively, versus the Nasdaq's impressive 27.4%,  and the powerful uptick in each companies' shares has adversely affected their valuations. Here's a breakdown of three popular valuation metrics for each company:

Data sources: Yahoo! Finance, Reuters. 

Apple's shares are cheaper than Microsoft's. But if price and value are two different things, which stock is the better value?

Here, we can examine sell-side analysts' consensus growth estimates. Analysts expect Apple to grow revenue 5.2% this year and 11% in 2018, while  Microsoft should grow sales 4.5% this year and 7.9% next year. So Apple appears to offer faster growth at a lower valuation, which is enough to earn it a victory in this final segment of our analysis.

Winner: Apple.

And the winner is... Apple

Microsoft has plenty going for it, particularly given the recent progress it's made in the cloud. However, as the cheaper stock with clearer near-term growth prospects working in its favor, Apple deserves a win as the better tech stock to own today.