Best Bear Market Buy: Apple vs. Microsoft

Apple (AAPL -1.51%) and Microsoft (MSFT -1.39%) are two titans of the tech industry — and two of the biggest companies in the world. While Microsoft derives most of its revenue from its software business, Apple’s bread and butter has always been its mobile hardware products. Which of these big tech leaders is the best buy right now?

Read on to see why two Motley Fool contributors have different opinions on the issue.

Apple has been innovating for decades

Parkev Tatevosyan: Apple is one of the most iconic companies in the world. It achieved this status by repeatedly creating innovative products, including the iPhone, iPod, iPad, Apple Watch, and AirPods. This history of innovation is one of the main reasons to invest in Apple. It would be a less lucrative title if its only claim to fame was the iPhone. Multiple products with billions in sales show evidence of an ability to repeatedly deliver products that consumers love.

This skill has helped Apple grow from $156 billion in revenue in 2012 to $366 billion in sales in 2021. Consumers desire its items so much that they command high prices, driving Apple’s operating profit to explode from $55 billion to $109 billion over the same period. An added benefit for shareholders is that Apple has developed a sticky ecosystem.

Once customers buy an iPhone and customize it to their liking, they are less likely to switch to another brand when upgrading. A change could mean the loss of content, playlists and preferences that some spend hours customizing.

The only reason to hesitate before buying Apple stock is that its excellent prospects are no secret to the market. Apple’s stock is trading at a relatively expensive valuation with a price to earnings ratio of 28.6 and a price to free cash flow ratio of 26.5.

AAPL Price to Free Cash Flow Data by YCharts.

These are near the upper end of its historical averages along these parameters. Yet paying a small premium for a great company can deliver exceptional returns for long-term investors.

Microsoft: the software giant is built for the future

Keith Noonan: Apple’s hardware business, associated software ecosystem, and brand strength are undeniably fantastic, but I think Microsoft’s focus on software makes it a better game in the long run. The growth of cloud-based applications and services is just beginning, and Microsoft is poised to take advantage of it as enterprises drive digital transformation initiatives and adopt and release new software.

Microsoft’s Azure cloud infrastructure service is one of the largest and most profitable offerings in the category, and it has huge avenue for long-term profitable growth. Despite the somewhat challenging macro backdrop, Microsoft said it added a record number of new deals in the above $100 million and above $1 billion categories last quarter.

Cloud infrastructure is a secular growth market, and Azure’s strengths allow Microsoft to benefit from its long-term expansion. Spending on digital transformation initiatives and cloud migration will continue even if economic conditions are unfavorable in the near term, and I believe this momentum gives Microsoft an advantage over Apple at current prices.

Apple has been able to generate fantastic margins on mobile hardware, and its user base spends far more on app purchases than users of Alphabetof the Android operating system. However, the company’s heavy reliance on hardware sales could make growth more difficult to achieve in the future, particularly if attempts to diversify into new product categories are not successful.

Which big tech giant should you buy today?

For investors confident in the long-term growth of the tech sector, investing in both Microsoft and Apple could be the right move. Otherwise, the choice between the two tech giants should come down to the company’s respective product offerings and growth opportunities that you think seem the strongest.

If you want to benefit from the evolution of cloud infrastructure and productivity software services, Microsoft is probably the best bet. However, if you see more promise in Apple’s high-margin hardware and evolving software and services ecosystem, shares of the iPhone company should be an obvious addition to the portfolio.

Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Keith Noonan has no position in the stocks mentioned. The Motley Fool has positions and recommends Alphabet (A shares), Alphabet (C shares), Apple and Microsoft. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.

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