Why Apple Stock Deserves to Be Cheaper than Microsoft's

Shares of Apple (AAPL -2.41%) are cheap. That's been true for a while.

As of writing, the stock most recently closed at $172.29 per share. During its most recent fiscal year -- that's fiscal 2018 -- the company raked $11.91 in earnings per diluted share. This means that if you go buy Apple stock at roughly that price, you're paying about 14.5 times the company's fiscal 2018 earnings.

Image source: Apple.

Now, the stock market is generally forward looking and analyst consensus calls for Apple's revenue to rise 5.4% and for its earnings per share to reach $13.48 in fiscal 2019, growing nearly 13.2% from fiscal 2018 levels. (Those estimates likely factor in both growth in net income as well as a significant reduction in Apple's share count as a result of its significant share repurchase program.)

This means that Apple stock trades at around 12.8 times fiscal 2019 estimates. By contrast, software giant Microsoft (MSFT -1.32%) trades at around 23.2 times analyst projections for 2019.

Here, I'd like to go over why Apple deserves to be cheaper than Microsoft.

Diversified Microsoft

Microsoft is a diversified business that's exposed to a number of different end markets. It sells licenses of its Windows operating system into both consumer and business PCs, operates one of the most successful cloud computing businesses in the world, has a strong position in gaming with its Xbox franchise, and dominates the market for productivity software with its Office family of products. And that's not all the company offers, either. (Check out a recent Microsoft earnings press release, in which the company breaks out the growth rates of each of its major product lines. There are a lot of them.)

Moreover, if you look at Microsoft's revenue last quarter, it was split pretty evenly between its three major reporting segments: 

Source: Microsoft earnings release; author calculations.

By contrast, Apple generated about 62.8% from a single product category, iPhone. Apple's iPhone business posted strong growth in fiscal 2018 thanks significantly to the iPhone X driving a boost in average selling prices, but so far the news around Apple's current product cycle has been decidedly negative. 

Given how important the iPhone is to Apple's overall business performance, the negativity around the company's latest iPhones isn't going to help the company earn a higher earnings multiple.

Growth rates

Apple is expected to see sales growth of 5.4% in its fiscal year 2019 followed by a more modest 4% growth in its fiscal 2020. By contrast, Microsoft is expected to see sales surge 12.7% in fiscal 2019 followed by another 10.6% growth in its fiscal 2020 . 

Now, analyst estimates are simply educated guesses and could very well be revised up or down as quarterly results come in, but right now analysts expect Microsoft to deliver more robust growth than Apple will over the next couple of years.

Investor takeaway

Ultimately, Microsoft is a more diversified business than Apple and it's a business that's expected to grow more quickly than Apple. It's little surprise, then, that Microsoft shares currently command a premium to Apple's.