At this point, Apple Inc. (NASDAQ:AAPL)’s stock story is well-known to many investors. After becoming the world’s most valuable company and breaking through $700 per share, Apple reached legendary status and sell-side analysts climbed over each other in a strange game of who-could-produce-the-highest-price-target.
One anti-Apple argument circulating through the financial media that seems particularly absurd is the comparison to Microsoft Corporation (NASDAQ:MSFT) back in the days of the Tech Bubble. Microsoft spent an entire decade providing investors with scant returns, after it endured the often-painful transition from a growth stock to a value stock. As some would tell you, Apple Inc. (NASDAQ:AAPL) is on a similar path, and its investors should get ready for a decade of stagnant returns. However, the truth is that calls for Apple to become the next Microsoft Corporation (NASDAQ:MSFT) are ridiculous, and it doesn’t take much research to see why.
Let history be our guide
Financial pundits love to call Microsoft dead money. In 2000, the stock reached almost $60 per share. After the tech bubble burst, the stock fell to less than $30, and indeed has traded near that level ever since. The fundamentals, meanwhile, paint a different picture—and it’s the underlying fundamentals that show us why Apple Inc. (NASDAQ:AAPL)’s situation is not at all similar.
In fiscal 2001, Microsoft Corporation (NASDAQ:MSFT) booked diluted earnings per share of $1.32 on revenues of $25 billion. Investors buying at $60 paid 45 times those earnings. The fact is, over the next decade, Microsoft grew its sales and profits at compound annual growth rates of 10.7% and 7.4%, respectively. Last year, Microsoft booked adjusted diluted earnings per share of $2.73 –not exactly fitting the description of a “dead” company.
But the underlying sales and earnings growth, which were actually solid, weren’t enough to deliver shareholders meaningful returns over that decade. That’s because when you pay 45 times earnings for a mature company, you’re asking for trouble.
No longer the Apple of the market’s eye
Even considering the uproar over Apple Inc. (NASDAQ:AAPL)’s supposedly poor earnings reports over the past few quarters, Apple isn’t trading nearly as expensively as Microsoft Corporation (NASDAQ:MSFT) was at the height of the tech bubble.
Apple currently trades for 10 times its trailing earnings per share, not anywhere close to the level Microsoft investors paid in 2001.
That’s why it’s downright laughable when financial commentators suggest that Apple is on a similar trajectory as Microsoft Corporation (NASDAQ:MSFT) was during its own lost decade. Quite frankly, Apple Inc. (NASDAQ:AAPL) investors don’t need huge growth numbers to justify where the company currently trades.
And, when you consider the margin of safety provided by the company’s gigantic cash pile (currently $145 billion in cash, equivalents, and short and long term marketable securities), as well as the stock’s 3% dividend yield and $60 billion share buyback program, you can clearly see that Apple Inc. (NASDAQ:AAPL) investors are in a much better position now than Microsoft’s investors were in 2001.
Put simply, the difference between Microsoft Corporation (NASDAQ:MSFT) at the start of its lost decade and Apple’s current position is clear. Microsoft needed to produce huge growth rates in sales and earnings to justify its lofty valuation as the Tech Bubble inflated, whereas Apple would need to experience nothing less than a collapse in its business for investors to not earn reasonable returns going forward.
The article Why Apple Is Not Microsoft originally appeared on Fool.com and is written by Robert Ciura.
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