Apple & Microsoft: Recent Developments

Much has been made of the recent surge in Apple's stock price since the unveiling of the iPhone and AppleTV last week. Similarly, pundits are now noting Microsoft's recent stock price resurgence of the past six months.

For my own portfolio, Apple did not make the list for January's selections. Thus, I sold my position the day before the MacWorld announcements regarding the new products.

Is either Apple or Microsoft now a "buy?" Has either company altered its long-term fortunes recently?

For comparison, I've downloaded four Yahoo-sourced charts (larger versions may be seen by clicking on each chart) displaying stock prices for Microsoft, Apple, and the S&P500 Index level for the past six months, one, two and five years.

Surprising as it may be, over the last six months, Apple is actually the best performer. Both companies easily beat the S&P, but Apple also handily beat Microsoft.

Apple's price increase reflected, in part, its resurgence from a horrible drop in the first half of 2006, illustrated in the next chart.

Notice, too, how both companies' stock prices fell at about the time in the spring when economic pundits wrongly believed that the US economy was heading for a recession.

Looking at the past two years, we see that Apple again significantly outperforms Microsoft, which is essentially tied with the S&P. The latter two barely eked out a gain, while Apple rose handsomely.

The last chart, below, shows the five year price histories. Once again, the magnitude of Apple's outperformance, relative to Microsoft and the index, are apparent. It's not even remotely close.

My point is, when viewed over any period substantially longer than just the last six months, Microsoft is really not looking all that remarkable. My proprietary research shows that it takes at least three years to really sort out the merely temporarily lucky firms from the truly consistently excellent ones. Apple has done this, but Microsoft is very far from doing so.

This makes Microsoft essentially a timing stock. It may continue rising. Then again, it may not. How many people do you think actually bought Microsoft last July, expecting a 50% rise? Probably not too many.

Of course, some analysts argue that the XBox is for Microsoft what the iPod was for Apple. That it will transform the software titan. Well, it is, but with one important difference. The iPod saved and dramatically reconfigured Apple. Microsoft is so much larger, with so much more mass in its computer software operations, that the XBox's effect on the company can't be as large as the iPod's was on Apple. So, it's unlikely that Microsoft has sufficient arrows in its quiver right now to continue anything resembling its recent stock price run up. So, in the long run, I doubt that the XBox can 'save' or 'turnaround' Microsoft. To do that, it would have to be spun out, off, or out to shareholders. Then, of course, it wouldn't 'save' Microsoft, but simply benefit the shareholders who paid for XBox's development.

Why did my portfolio selection process not include Apple, after holding it these past six months? Well, the one-year price chart explains why. Over the past year, Apple's return was not all that much better than the index's. And that simply doesn't provide enough margin for error in my selection process. It's quite possible that Apple may be selected again in the coming months. But for now, it's just not quite 'superior' enough, recently, to merit inclusion.

For what it's worth, I saw Steve Ballmer mock and insult the iPhone this week in a CNBC interview. He was, I believe, appearing with Verizon personnel to attempt to demonstrate Microsoft's presence in the corporate communications market. While many of Ballmer's comments are probably correct regarding the iPhone, his company hardly has a presence on its own, and the existing phone-based services are not all that good. But what was very revealing was Ballmer alleging that he really doesn't focus that much on his company's stock price. No kidding. When you are now independently wealthy, why should you? Your best friend is chairman, and you are financially secure.

Of course, it's not Steve Ballmer's company, or Bill Gates' company. It's the woefully-under-represented shareholders' company. And it performs like one, doesn't it?

So, my expectation for the coming months is: no 'buy' signal from my selection process for Microsoft, but maybe for Apple.