Apple and Microsoft shares are the two largest by market weighting in the S&P 500. (Photo: 123RF)
Once competitors in the field of personal computers under the leadership of strong personalities and innovators, Steve Jobs and Bill Gates, Apple and Microsoft are now two diversified technological giants. In fact, Apple stock and Microsoft stock are the two largest by stock weighting in the S&P 500.
Apple posted strong quarterly earnings in October, and management did not provide guidance for the next quarter due to ongoing macroeconomic uncertainty. Morningstar expects Apple sales to slow due to currency challenges and high inflation.
Microsoft, meanwhile, posted strong results, but macroeconomic pressures lowered the forecast. Accordingly, Morningstar reduced its fair value estimate for Microsoft stock.
Given the headwinds currently facing the two companies and where their shares are currently trading, investors are entitled to ask: is this the time to buy Apple stock? or that of Microsoft? Here’s how Apple and Microsoft counted on November 7, 2022, according to a few yardsticks for measuring placements.
|Price to fair value ratio||1.07||0.69|
|Morningstar Uncertainty Rating||High||Mean|
|Morningstar Moat Score||Moderate||Strong|
|Morningstar Capital Allocation Rating||Copy||Copy|
Which action emerges as a winner from this comparison? It depends on the importance given by an investor to each of the measurement standards used by Morningstar. Let’s take a deeper look.
Price to fair value ratio: 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 cash the company could generate, according to Morningstar, in the future.
A stock’s price-to-fair value ratio is simply its current market value divided by its estimated fair value. A stock that is trading below 1.0 is undervalued; a stock trading around 1.0 is at fair value; a stock that is trading above 1.0 is overvalued.
As of this writing, we believe Microsoft’s stock is around 31% undervalued, while Apple’s is 7% overvalued. The winning stock from a price perspective is Microsoft, which is trading at a more attractive price at this hour.
Uncertainty: the prize goes to Microsoft
The Morningstar Uncertainty Rating represents the predictability of the company’s future cash flows, and therefore the level 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 unforeseen events 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 rating because we are more confident in our estimate of fair value for the stock.
Economic Moat: The Prize Goes to Microsoft
The Morningstar Moat Rating represents a company’s sustainable competitive advantage. A company with an economic moat can hold the competition at bay and earn high returns on invested capital for many years to come.
A company whose competitive advantages we believe can last 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 whose advantage we believe will dissipate 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: equality
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. Skillful company managers can make a good company even better.
Apple and Microsoft both receive our maximum rating in the area of 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 trades at the biggest discount to our estimate of fair value after adjusting for the ‘uncertainty.
The Morningstar rating for stocks covers precisely this notion. 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.