Wednesday, July 5, 2017

The Strange Valuation of Microsoft Compared to Apple on July 4, 2017

The Strange Valuation of Microsoft Compared to Apple on July 4, 2017

Question:   Below are statistics on market cap, PE ratio, stock price target price, and comparison of target price to current stock price for two companies, Microsoft and Apple.  

Note, Microsoft has a PE ratio of 30.08 while Apple has a PE ratio of 16.83.   This is  a bit odd because Apple is viewed as a growth company and Microsoft if viewed as a value company.

What would the market cap of Apple be if it had the same PE ratio as Microsoft?

What would the market cap of Microsoft be if it had the same PE ratio as Apple?

Do the valuations of Microsoft and Apple seem reasonable to you?

Financial Statistics for MSFT and APPL
PE ratio
Target Price
Target Price over Price

Analysis:   The easiest way to get value of Apple if it had he PE ratio of Microsoft is to multiply the current value of Apple by the ratio of the Microsoft to Apple PE ratio.

(30.08/16.83) x 748.18 billion = $$1.337 trillion dollars.

Similarly, the easiest way to get the value of Microsoft if it had the PE ratio of Apple is to take the current value of Microsoft and multiply it by the ratio of Apple to Microsoft PE ratios.

(16.83/30.08) x 526.31 billion = $0.295 trillion.

The other way to solve this problem is calculate total earnings and multiply by the PE ratio of the other stock.   Total earnings can be obtained by dividing the market cap by the PE ratio.


 MKTCAP=Price X Number of Shares

(Price x Number of Shares)/ (Price/EPS)

= Number of Shares X EPS = Earnings

 The total earnings of Apple are $44.6 billion. 

Multiply Apples Total Earnings by Microsoft’s PE ratio of 30.08 and get $1.337 trillion.

Discussion of the Market’s View of Apple and Microsoft:  it is very unusual for Microsoft to have a PE ratio that is this much larger than the PE ratio for Apple.

Apple is the growth company.   It is in fact, the single largest holding of VUG, Vanguard large-cap growth fund.

Microsoft is the value company.  It is in fact the single largest holding of VTV, Vanguard large-cap value fund.

I looked at the average PE ratios of the 25 largest holdings of VUG and VTF. I excluded one firm with negative earnings.   The average stock PE ratio was nearly 11 points higher for the growth stocks than the value stocks.   The difference was not significant because of outliers and a large standard error.

Still growth stocks tend to have higher PE ratios than comparable value stocks.

This is not so for Apple and Microsoft.


I am not sure.

Here are some potential reasons.

Apples product line may be a bit riskier and too dependent on the iphone.

Risk averse portfolio managers and pension funds may limit their stakes in a single company and this risk aversion may limit the growth of the largest stock.  There may in fact be dollar limits on the amount of a single stock that can be held by a portfolio and such rules would limit buying of more Apple Stock.

Apple’s dividend is relatively small.

Apple has some tax problems with the EU and potentially with the U.S. government.

Still even after considering these factors it is obvious to me that Apple has a lot more upside than Microsoft.   I can’t justify the much higher PE ratio for Apple.   Also, Apple has much more upside than Microsoft and I can’t trust the nearly identical ratios of target and current price for the two stocks.

My recommendations are to take profits from Microsoft and cautiously increase shares of Apple should the market continue to dip. 

Authors Note:  I have been working really hard on policy proposals to lower college costs and improve educational outcomes.  Free college and moving everyone to charter schools will not work  A list of my proposals can be found at the link below:

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