Microsoft's Fourth Quarter

With Apple (AAPL) stock down Friday to $130 per share, off 36% from its recent peak of $202.96, folks might want to revisit the adage "slow and steady wins the race." Apple is a good profit generator and reported good Q4 2007 earnings recently, but its stock had been in its own private bubble. Its high PE ratio could only be maintained by the fiction of eternal rapid revenue and earnings growth. With iPod sales up only 5% from year-earlier (which I warned about: See Apple iPod Sales Decelerate?), Apple will probably continue to grow. But not at the rate it has seen since the iPod lifted it off its moribund pre-iPod base.

Even after Friday was over Apple's P/E ratio was 28.51. Microsoft had a very upbeat Q4 earnings report on Thursday, but its PE ratio at close of day Friday was a quite conservative 18 (I am using today's Nasdaq figures: be warned all PE calculations are not alike!).

See my Summary of Microsoft's January 24, 2008 Analyst Conference for details on Q4 2007 (their fiscal Q2 2008). Here I'll just highlight some issues.

Microsoft revenue was $16.37 billion, up 30% from year earlier. Basically everything sold well, from Xbox 360 consoles and games to Vista to business software like SQL Server and Office. This figure was turbocharged because in the December 2006 quarter some revenues were deferred for purchases of Windows XP that allowed a free upgrade to Vista.

Earnings per share (EPS) were $0.50, almost doubling the $0.26 of the year-earlier quarter.

Like Apple, Microsoft's business is somewhat seasonal. It is strongest in the back-to-school and Christmas periods. So for the March quarter Microsoft guidance on EPS is $0.42 to $0.45. Still, the earnings run rate is moving towards $2 per share per year.

Apple's earnings were also growing quickly, up 54% from year earlier.

A economist who believes in rational investors and pricing being automatically set by free markets would have trouble with these numbers. If what investors want is earnings, and Microsoft's earnings are growing faster than Apples, then Microsoft should have a higher PE ratio than Apple, not a lower one.

Well, in case you had not noticed, investors are not entirely rational, and auction pricing of stocks drives prices away from equilibrium in the short run.

There are many details that can be picked apart in the Microsoft and Apple stories to justify bullish and bearish attitudes towards the stocks. But overall, Apple is a pet stock just as its technologies are driven by fashion over function. Microsoft is boring. The only reason to own Microsoft stock is to make money.

The death of Microsoft has been much heralded. Many companies that were going to kill Microsoft are themselves dead. The Internet did not kill Microsoft, and neither did Google. Oh, sure, it still might happen. Microsoft has a very, very, broad set of offerings; failure in one area can be made up in other areas.

Because of the current liquidity scare both companies stock prices now look undervalued to me, and that is true of many technology companies.

The most important thing is not whether you have a lot of Apple stock of Microsoft stock, but how smart you are in diversification. Diversification hedges your bets, but you still want to be careful in the selection of each and every stock in your portfolio.

I own Microsoft stock and have worked freelance for Microsoft. I don't own Apple stock, but have friends and family that own Apple stock and/or work(ed) for Apple.

More data:

My Microsoft main page
My Apple main page

Apple iPod Sales Decelerate?

According to an article (Holiday CE sales slower than last year) at EE Times Asia, sales of portable music players (MP3 players) declined in the U.S. during the first three weeks of the holiday shopping season. Of course Apple dominates this sector of the consumer electronics market with its iPod MP3 players.

Several caveats before you sell your Apple (AAPL) stock: I don't know how accurate this report is. If it is accurate, it is possible that Apple gained market share, that is the losses came out of other player makers like Creative Zen, Sony, or SanDisk.

But here are some numbers on the bad news: "Dollar sales of MP3 players between Nov. 18 and Dec. 9 were down 16 percent from the same period last year, while unit sales declined 9 percent, the NPD Group said."

With dollar sales down more than unit sales, it is very possible that people are tired of $400 iPods breaking or being stolen. They are buying down market.

And who wants an MP3 player now, who does not already have one? Plus the Apple iPod is getting pretty retro; it does not look innovative any more. Maybe kids have learned that they don't need the iTunes music service to load music into their iPods or non-Apple music players.

Apple won't give Q4 numbers to investors until January 22nd. Sales of iPhones and iMacs may make up for iPod weakness, if there really is any.

But Apple's stock is flying pretty high, maybe not bubble high, but investors have shown a great deal of confidence that it can only go up, and that usually happens before a fall. Apples P/E (Price to Earnings) ratio is over 50. That is justifiable only if Apple revenues and profits continue to grow at the hot pace of the last few years.

On the other hand, Apple has its fans. If Q4 numbers are weak they may not be deterred. Maybe Steve Jobs will announce some fantastic income stream for 2008. Maybe he wants Appleheads to buy iPhones instead of iPods now.

Still, I'd advise caution to anyone thinking of buying Apple stock right now. Congratulations to those of you who bought it in 2000, when the future looked bleak.

Always diversify your risk. Any stock that has become a disproportionate position in your portfolio should be whittled down.

I don't own Apple stock, and I own stock in competitors like AMD and Microsoft (but also in chipmaker Marvell that supplies chips for Apple products).

More data:

My Apple page
Apple corporate investor page
Nasdaq Apple data summary page