Apple vs Microsoft: Which is the stronger tech giant?

Apple versus Microsoft is one of the most famous and storied rivalries in corporate history. Both companies were founded in Silicon Valley in the 1970s and were fierce competitors in the home computer market in their early history. By the 1990s, Microsoft had won the home computer war (Windows still holds a 73% market share in desktop operating systems worldwide), but Apple stormed backed in the new millennium with the invention of the iPhone which launched a whole new ecosystem of ‘apps’ and the age of mobile computing.

Apple and Microsoft are still tech giants today – they regularly swap top position as the most valuable public company in the U.S. – and remain dominant companies in their industries. It’s easy to think that Apple and Microsoft remain the other’s prime opponent to this day. However, despite their past competition, both companies are no longer rivals like they once were. In this article, we’ll discover why are Apple and Microsoft no longer primarily compete with each other, and which has a ‘stronger’ business model.

Apple’s business model

Apple’s business model primarily revolves around consumer tech and hardware. Let’s have a look at Apple’s segmental revenue to better understand its business model. Apple splits its business segments into key product categories – iPhone; Mac; iPad; Wearables, Home and Accessories; and Services.

Apple revenue by segment. Chart: moomoo

Quick breakdown:

  • The iPhone, Mac, and iPad categories are self-explanatory.
  • Wearables, Home and Accessories includes sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and accessories.
  • Services include sales from the company’s advertising, AppleCare, cloud, digital content (App Store), payment, and other services.

As you can tell straightaway, the iPhone remains Apple’s crown jewel and largest revenue contributor. This is no surprise as the iPhone remains the most popular smartphone brand around the world. The success of each new version of the iPhone will continue to play a major role in Apple’s financial performance.

Services is the next biggest segment and is increasingly becoming Apple’s key growth driver. This is mainly due to two reasons. The first is that the Services segment is a high-margin business compared to Apple’s other product hardware categories; Apple’s Services segment generates gross margins of 70% compared to 35% for Products.

Apple gross margins. Source: Apple

Next, many of Apple services are subscriptions in nature: AppleCare, iCloud, Apple Music, Apple TV+ all charge recurring annual or monthly fees for users to continue using their services. These subscriptions generate stable, predictable revenues for Apple. On the other hand, most consumers may only purchase a new iPhone or device once every few years.

Microsoft’s business model

Microsoft’s business model primarily revolves around software and cloud computing. However, the company also has stakes in hardware, gaming, search, and a social network (LinkedIn). Microsoft splits its business into three main segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

Microsoft revenue by segment. Chart: moomoo

These segments are further broken down into key product categories.

Productivity and Business Processes

  • Office comprises Office Commercial and Office Consumer products and subscriptions
  • LinkedIn comprises LinkedIn revenue and subscriptions

Intelligent Cloud:

  • Server products and cloud services comprises Azure and other cloud services
  • Enterprise services comprises Premier Support services and Microsoft Consulting services

More Personal Computing

  • Windows comprises licensing of the Windows operating system
  • Devices includes sales of Surface and PC accessories
  • Gaming comprises sales of Xbox hardware and services, subscriptions, and video games
  • Search advertising comprises Bing advertising revenue

Sorted by revenue, the top four product categories are Server products and cloud services, Office, Windows, and Gaming.

Microsoft revenue by product category. Source: Microsoft

As you can see, Microsoft’s business model is more diversified and generates revenues from a wider breadth of sources. Windows and Office, probably two of Microsoft’s most well-known products, remain the world’s dominant desktop operating system and office productivity software respectively to this day. (Case in point: I wrote this article on Microsoft Word on a Windows laptop.)

In the Gaming segment, Microsoft’s Xbox shares a 20-year rivalry with Sony’s PlayStation. While the latter has outsold the former over the years, the Xbox is regarded as a qualified success for Microsoft. Other than Xbox, Microsoft also owns a number of game publishers and developers. With the latest news that the company is acquiring Activision Blizzard (the makers of Warcraft and Call of Duty), Microsoft will cement its position as a major player in the video game market which is projected to grow to over US$200 billion by 2023.

Finally, Microsoft’s cloud computing business arguably the largest growth driver for the company. With our lives and work becoming increasingly digitized post-pandemic, the global cloud computing market is projected to grow to US$1.3 trillion by 2025. Microsoft is already No. 2 in global cloud market and can count on its strong base of enterprise clients as many progressively pivot from a traditional enterprise computing environment to a cloud-first one.

CEO Satya Nadella has openly emphasized the importance of cloud in Microsoft’s business: ‘At our core, Microsoft is the productivity and platform company for the mobile-first and cloud-first world.’

Financial performance

Now let’s do a quick comparison of their key financial ratios.

Selected financial ratios. Source: moomoo

The first thing that jumps out is that Apple’s return on equity (ROE) is a massive 147.44%. (Microsoft’s ROE of 47.08% is nothing to sniff at too; an ROE above 15% is considered good.)

The reason why Apple’s ROE is so high is due to share buybacks: Apple has been steadily repurchasing stock over the last 10 years and could continue doing so for the next 15 years. Apple also employs more debt in its capital structure as seen by its higher debt-to-asset ratio of 82.03%. A debt-heavier capital structure lowers the proportion of equity, which boosts ROE.

On the other hand, Microsoft enjoys higher gross and net profit margins due to its business model; selling software typically has a higher margin than hardware.

As dominant tech companies, Apple and Microsoft have done tremendously well over the last five years. From 2017 to 2021, Apple’s revenue has grown by 60% to US$365.8 billion, and its net profit has grown by 96% to US$94.7 billion. Likewise, Microsoft’s revenue has grown by 74% to US$168.1 billion, and its net profit has grown by 140% to US$61.2 billion over the same period.

The fifth perspective

Apple and Microsoft are both great companies to own. However, just like how you may choose a Mac over a PC (or vice versa), which is a ‘better’ company boils down to your personal preference.

Apple is a leader in consumer tech and hardware, while Microsoft is a frontrunner in software and cloud. Apple has enormous brand equity among consumers, while Microsoft maintains the backbone of enterprise IT operations around the world. At the same time, Apple currently relies on sales of the iPhone and Apple devices to keep users within its ecosystem of apps and subscriptions, while Microsoft’s business model is much more diversified.

At the end of the day though, you don’t necessarily have to pick one. As a Windows and iPhone user like me, you can always own both.

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This article was written in collaboration with Futu Singapore Pte. Ltd.

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Adam Wong

Adam Wong is the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller's List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller's List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.

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