Sharon Machlis

Is Apple really more valuable than Microsoft?

May 28, 2010 10:43 AM EDT

Microsoft has a stranglehold on the desktop OS market and near monopoly on desktop office suites, it's enjoying a highly successful new operating system launch, and it's got an enviable debt-free balance sheet, with $8 billion cash on hand and assets more than double its liabilities. Apple, meanwhile, is a company whose innovation capacity seems too dependent on a single executive -- one with health issues, at that; while its once-game-changing iPhone faces serious open-source competition from Android.

As for profitability, well, Microsoft's profit margins are larger (29% vs 21%), it's price/earnings ratio is more attractive, its revenues are billions higher and its profits are more than double Apple's.

Should Apple Computer Inc. really be valued more highly than Microsoft Corp.?

As a snapshot in time, the market may be right on this one.

From the iPod to iPhone to iPad, Apple is well positioned to take advantage of the hot, high-growth, high-potential mobile market. It's innovated impressively on both the software and hardware sides. Meanwhile Microsoft -- like IBM before it -- has found its most important product line situated in a technology area that's become distinctly non-sexy. When you've got the lion's share of a market where growth has stabilized at best and margins are unlikely to rise, which certainly seems the case for desktop software, it's hard to be seen as a hot investment. That's more the prescription for a blue chip "widows and orphans" stock, back in the day when there actually were such dependable things on Wall Street.

In the (very) short term, yes, Apple looks like the better buy.

However, looking out longer, I'm not convinced that Apple's market position is as robust as its stock price would have you believe.

The mobile market will be moving quickly over the next few years, and I've yet to see evidence that Apple can innovate effectively without Steve Jobs at the helm. He may be there for a long while, but investors will still be holding stock in Apple, not Jobs, the day after Jobs steps down, whenever that may be.

The intense corporate secrecy -- the less charitable might call it paranoia -- also concerns me. I'm not convinced the next wave of computing will be as kind to closed systems and one-source control as it was in the Microsoft era. Users frustrated at Apple's ironclad control over its apps store may be increasingly willing to turn to an open-source alternative like Android. I know that next time my mobile phone contract is up, I'll be looking for an app platform where one company doesn't have a chokehold.

To remain on top, Apple will need to keep its hardware and software substantially more compelling than its competitors, which will be an increasingly tough task as tons of venture and other investment money floods into its markets.

It's good to keep a healthy skepticism about the wisdom of crowds when it comes to investments. Because truly smart investors look for undervalued growth opportunities. Not this month's Hot Stock.

Sharon Machlis is online managing editor at Computerworld and a former business editor. Her e-mail address is smachlis@computerworld.com. You can follow her on Twitter Twitter @sharon000 or subscribe to her RSS feeds:
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