Is Apple (AAPL) Currently More Fairly Priced
than Microsoft (MSFT)?

By Stock Research Pro • September 27th, 2009

With all of the current hype around Apple’s (AAPL) current stock price and questions as to whether it’s overvalued, we decided to run a competing discounted cash flow (DCF) analysis against industry competitor Microsoft (MSFT) using the SRP Valuation software to see what we could learn.

Disclaimer: This is not a recommendation of any kind regarding the purchase or any action on this stock. It is up to you, the investor, to make your own assessments and investment decisions.

Company Description: Microsoft Corporation, with headquarters in Redmond, WA, provides software and hardware products worldwide to consumers, businesses of all size, and government entities. Founded in 1975, the company is generally segmented into divisions that include Client, Server and Tools, Online Services, Business, and Entertainment and Devices.

Sector: Technology

Industry: Personal Computer

Primary Competitors: Dell (DELL), Apple (AAPL), Hewlett Packard (HPQ)

Financial Ratios

We used the Ratios module in the SRP Valuation software to arrive at the following values:

- Liquidity: Current Ratio 1.82

Comment: Greater than 1.0, Indicates the company is able to meet is short-term debt obligations.

- Leverage: Debt/ Equity N/A (MSFT has no long-term debt)

Comment: Less than 0.5, Very favorable.

- Profitability: Return on Equity (ROE) 36.83%

Comment: Greater than 20%, ROE meets criteria often looked for by growth investors.

- Efficiency: Asset Turnover 75.03%

- Income: Dividend Yield 2.04%

Comment: Higher than industry competitor HPQ (.70%). Industry competitors AAPL and DELL do not pay dividends.

- Valuation: Price/Earnings (P/E) 15.77

Comment: Significantly lower than industry competitor AAPL (31.88). This ratio is in line with industry competitors DELL (16.3), and HPQ (15.83). Lower than the maximum P/E often sought after by value investors (20)

Note: We also used the SRP Valuation software to run a Graham Net Current Asset Value per Share (NCAVPS) analysis, comparing current assets to total liabilities to further assess financial health. MSFT currently calculates as “Not Healthy” against this very strict measure.

Valuation Analysis

Discounted Cash Flow: Discounted Cash Flow (DCF) analysis is a measure for arriving at the fair market value of a stock under the assumption that the real or “intrinsic” value of a stock is derived by summing discounted future cash flows. The SRP Valuation software leverages a company’s free cash flow, evaluating expected growth over the next five years and terminating at 3% (average overall economic growth) thereafter.

Assuming a discount rate of 12%, MSFT will need to achieve average five-year growth of about 16.5% to be fairly valued today. In contrast, AAPL requires just over 15%.

Analyst Growth Estimates: Next Five Years, 10.17%. Click here for details.

Re-running the DCF analysis with all other factors held consistent and plugging in the analyst forecasted growth rate of 10.17% over five years calculates an intrinsic value of $20.75 for a current margin of safey of -18.78%.

My Thoughts: This one was interesting to me because it made me see AAPL differently. It seems like that company is certain of where its furture growth will come from and its identity moving forward. I don’t see that with MSFT, especially after the Vista nightmare and their ongoing status as “also ran” in the race for online dominance.


Click here to download and try to the SRP Valuation and
Stock Research Pro software packages.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.


Leave a Comment

You must be logged in to post a comment.

« Is Apple (AAPL) Currently Overvalued?
A Discounted Cash Flow (DCF) Analysis
| Home | Dell, Inc. Stock Investment Analysis »

The Stock Research Pro Guide
to Fundamental Analysis
  • Target companies to invest in
  • Use financial statements to pick winners
  • Identify a strong management team
  • Run financial ratios to confirm strength
  • Find undervalued stocks
Please Send Me My Free 22 Page Report!
We value your privacy like our own and will never share your information with anyone.

Recent Posts