Apple and Microsoft shares are the two largest by market weighting in the S&P 500. (Photo: 123RF)
Once competitors in personal computing under the leadership of strong personalities and innovators, Steve Jobs and Bill Gates, Apple and Microsoft are now two diversified technology giants. In fact, Apple stock and Microsoft stock are the top two by stock weighting in the S&P 500.
Apple had strong quarterly earnings in October, and management did not provide guidance for the next quarter due to continued macroeconomic uncertainty. Morningstar expects Apple’s sales to slow due to currency challenges and high inflation.
Microsoft, meanwhile, delivered strong results, but macroeconomic pressures lowered the forecast. As a result, Morningstar reduced its fair value estimate for Microsoft shares.
Given the headwinds the two companies are currently facing and where their shares are currently trading, investors are right to ask: is it time to buy Apple stock or Microsoft’s? Here’s how Apple and Microsoft ranked on November 7, 2022, according to a few benchmarks for measuring rankings.
|Price in relation to fair value||1.07||0.69|
|Morningstar Uncertainty Rating||High||Mean|
|Morningstar Moat Rating||Moderate||Strong|
|Morningstar Capital Allocation Rating||Copy||Copy|
Which act emerges as a winner in this comparison? It depends on the importance that an investor attaches to each of the measurement standards that Morningstar uses. Let’s take a deeper look.
Ratio between price and fair value: the price goes to Microsoft
Morningstar analysts calculate a fair value estimate for each stock they cover. The fair value estimate represents the intrinsic value of a stock based on how much money the company could generate in the future, according to Morningstar.
A stock’s price-to-fair value ratio is simply its current market value divided by its estimated fair value. A stock trading below 1.0 is undervalued; a stock trading around 1.0 is at fair value; a stock trading above 1.0 is overvalued.
As of this writing, we believe Microsoft’s stock is about 31% undervalued, while Apple’s is 7% overvalued. The winning stock from a price perspective is Microsoft, which trades at a more attractive price at this time.
Uncertainty: The prize goes to Microsoft
The Morningstar Uncertainty Rating represents the predictability of the company’s future cash flows, and therefore the degree of certainty we have in our estimate of the fair value of a given company.
Companies with predictable sales, modest operating and financial debt and limited exposure to unforeseen events receive a low uncertainty rating; those whose sales are less predictable and have significant indebtedness in addition to having significant exposure to contingencies receive a higher uncertainty rating.
Our analysts believe that Microsoft’s cash flow uncertainty is medium, while Apple’s is high. Microsoft wins on the uncertainty assessment because we are more confident in our estimate of the stock’s fair value.
Economic Moat: The award goes to Microsoft
The Morningstar Moat Rating represents a company’s sustainable competitive advantage. A company with a financial moat can keep the competition at bay and earn high returns on invested capital for many years to come.
A company whose competitive advantage we believe can last for more than 20 years has a wide moat, a company that can keep rivals at bay for 10 years has a moderate moat, while a company that has no competitive advantage or if advantage we think will disappear quickly has no moat.
Our analysts believe that Microsoft has built a wide moat, while Apple’s is more moderate. Microsoft is therefore the winner in this regard.
Capital allocation: equity
The Morningstar Capital Allocation Rating represents our assessment of the skill with which a company manages its balance sheet, investments and distributions to shareholders.
Analysts give each company one of three ratings: exemplary, normal or poor.
Based on their assessment of how effectively a management team delivers returns to shareholders. Skilled business managers can make a good business even better.
Apple and Microsoft both receive our maximum rating in capital allocation.
What is the best stock to buy right now?
Ultimately, the “winning” stock in a comparison between two companies, from Morningtar’s perspective, is the stock that is trading at the largest discount to our estimate of fair value after adjusting for the ‘uncertainty’.
The Morningstar rating for stocks covers this very concept. Stocks rated 4 and 5 stars are undervalued after adjusting for uncertainty, those rated 3 stars are at fair value, and stocks rated 1 or 2 stars are overvalued after adjusting for uncertainty.
As of this writing, Microsoft receives a 5-star rating and Apple receives a 3-star rating. Microsoft is the best stock to buy today from Morningstar’s perspective.