Earnings Preview: Apple to surpass Microsoft in revenue this quarter

Posted:
in AAPL Investors edited January 2014
After 30-years of living in the shadows of Microsoft, Steve Jobs and Co. will surpass its archenemies in Revenue this year. And as Apple’s staggering growth rate continues, its unlikely that Microsoft will be able to resume its dominance over the iPhone maker any time soon.



While doubts as to whether Apple (AAPL) deserves to hold the second largest market cap in the U.S. continue to mount, one thing it is clear: Apple has closed the revenue gap on Microsoft (MSFT), and looks to assume full supremacy over the software company. And though Apple still has a ways to go to compete with Microsoft in terms of net income due to Microsoft’s stunning operating margin, many will be surprised to learn that Apple will actually post more revenue than its rival in the 2010 and 2011 fiscal years.



In fact, when Microsoft reports second quarter calendar results after the bell this afternoon, its likely that Apple will have surpassed Microsoft in revenue for the first time in the company’s recent history - and that it will continue to do so in the future. Apple reported $3.25 billion in net income ($3.51) on a whopping $15.7 billion in revenue on Tuesday, smashing analyst expectations, and reporting more or less in line with my forecast.



Microsoft, on the other hand, is expected to earn $4.1 billion in net income ($0.46 in EPS) on $15.26 billion in revenue when it releases results after the bell today. That is nearly $500 million less than what Apple reported in revenue this quarter. And while Microsoft also regularly reports upside surprises making it very possible that it could edge out Apple in revenue, the gap between consensus estimates and Microsoft’s actual results is nowhere near as wide as it is with Apple’s results.



The chart below details a quarterly revenue comparison of Apple and Microsoft over the past few years. As one can see from the chart, Apple looks to surpass Microsoft’s quarterly revenue for the first time in recent history. More importantly, while Microsoft’s revenue growth appears to have slowed in recent years, Apple continues to post one record quarter after another. Since Microsoft and Apple are on a different fiscal year, the chart realigns their results to make them comparable on the calendar year.







So the big story in tech earnings this week is whether history will be made in the decades-long battle between Apple and Microsoft, or whether Microsoft will postpone the inevitable and maintain its dominance over Apple for at least one more quarter.



And even if Apple doesn’t beat Microsoft in sales this quarter, it will certainly do so next quarter and by quite a large margin. For the September quarter, analysts expect Apple to generate approximately $18 billion in revenue compared to a projected $15.16 billion expected out of Microsoft.



So even conservative analyst estimates already put Apple ahead of Microsoft by nearly $3 billion next quarter. My estimates put Apple ahead by $3.8 billion as I expect Apple to record nearly $18.9 billion in revenue.



What’s even more surprising is that Apple will likely far surpass Microsoft in revenue for the entire 2010 and 2011 fiscal year. In fact, I’m looking for Apple to record $81.6 billion in revenue in 2011 – that’s about $11.6 billion above the $70 billion I’m expecting out of Microsoft. Even the 2010 and 2011 conservative analyst consensus puts Apple well ahead of Microsoft. Thus, it’s looking increasingly likely that this quarter sets the beginning of a new age where Apple will regularly post higher revenue than Microsoft going forward.



The chart below compares Apple and Microsoft’s annual fiscal revenue for the past several years. While quarterly data must be compared on the calendar year to show a side by side comparison over a particular 3-month period, yearly data can be analyzed on the fiscal year.







Yet, when it comes to questions as to which company ought to have a larger market capitalization, total revenue is but a single of several factors that should be considered. Net income growth, total net income, total net cash, cash flow, book value, total assets and the economic sensitivity of each company’s primary operations are just a few of those other key factors.



So while Apple will be surpassing Microsoft in revenue in the near future, that in and of itself doesn’t necessarily mean that Apple automatically ‘ought’ to have a larger market capitalization. Though under closer scrutiny one will find that within the next year or so, Apple will soon not only record more revenue than Microsoft, but will earn more in net income, generate a larger amount of cash, and out-pace Microsoft in terms of growth in net income and revenue.



Still, Apple does have a ways to go before it will surpass Microsoft in net income. Due to Microsoft’s extraordinarily high operating margin, the only way Apple can beat Microsoft in earnings is by simply outpacing it in sales. Since Microsoft pushes more of its revenue to the bottom line, Apple will have to significantly outpace Microsoft in revenue to win on the net income front – something that Apple will probably do in 2012. The chart below compares Apple and Microsoft’s net income for the last several fiscal years, and offers projections for 2011.







Though these two companies no longer really operate in the same space as they once did in the past, Apple turning its focus on the consumer and Microsoft on enterprise spending, both companies are dominating their respective industries. Yet, several Microsoft investors have argued that it’s somehow inappropriate to compare Apple to Microsoft since Apple is a device maker and Microsoft an enterprise software maker. Nothing can be further from the truth.



Such arguments not only reek of the highest level of financial irrationality, but they are also rooted in a dangerously mislead ideology. Any two companies that make money are automatically comparable. For while the comparison may or may not be appropriate in a cross sector analysis, any two publically traded companies can in fact be compared on a fundamental return on equity basis. That much is clear. If a multi-trillionaire wanted to buy either of these companies, a fundamental comparison is not only appropriate but required for sound due diligence.



Moreover, even in a cross sector analysis where an investor wishes to determine which company is best in breed, Apple and Microsoft do in fact participate in the technology sector despite the little operational overlap between the two companies. It’s not as if Apple is a pharmaceutical company, and Microsoft an oil refiner. In fact, I’m actually shocked that I have to spell out such a rudimentary concept of finance to the average investor. If you believe that these two companies aren’t comparable, you should reconsider whether participating in the equity markets makes the most sense.



Thus, what’s left to be decided is which of these two tech giants deserves to be crowned the supreme leader of the tech sector as a whole? The answer to that question will be addressed in future articles I’ll be writing over the next few weeks. Stay tuned.
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Comments

  • Reply 1 of 90
    quadra 610quadra 610 Posts: 6,756member
    No surprise. Microjunk has lost its edge. Well, the "edge" that comes from their universal-licensing racket. You can only ride the coattails of that gig so long.
  • Reply 2 of 90
    rbonnerrbonner Posts: 635member
    While doubts as to whether Apple (AAPL) deserves to hold the second largest market cap in the U.S. continue to mount





    Do you have references to the above, have not read anything on this.
  • Reply 3 of 90
    lkrupplkrupp Posts: 9,450member
    It's great to see Apple having its day once again, finally. Way back in 1982 I purchased my first Apple product, an Apple II+. Back then there were literally dozens of personal computers on the market, names the younger crowd have never heard of. I looked and looked and looked at most of them. It was plainly obvious that the Apple II+ stood head and shoulders above the rest in quality, features and design. It was also significantly more expensive. I thought long and hard and decided to pay my very first so-called Apple tax. I have never regretted that decision. Not once!



    For those who weren't even born then the Apple II+ was headless and shipped with 48 kilobytes of ram. It was a one piece design with an integrated keyboard. The price for this beauty was $1295.00. You used a standard television as a monitor and a cassette tape player to input programs. When the Disk II arrived it was $695.00 for a storage capacity of 150 kilobytes on a single sided 5.25 inch floppy diskette.



    To this day I believe Apple products to be superior to anything else on the market.
  • Reply 4 of 90
    sdw2001sdw2001 Posts: 17,663member
    Quote:
    Originally Posted by rbonner View Post


    While doubts as to whether Apple (AAPL) deserves to hold the second largest market cap in the U.S. continue to mount





    Do you have references to the above, have not read anything on this.



    That's because you're ignorant, apparently. Try this thing called "Google." It's magical.
  • Reply 5 of 90
    applestudapplestud Posts: 367member
    Who is this idiot writing these analyses? Anybody with an accounting 101 class under their belt could do this.
  • Reply 6 of 90
    It is no surpise for me as apple is really the leader.. look at how advanced ipad is in muti-touch , ipad supports up to 11 muti-touches while iphone supports up to 5 which is super responsive and accurate. Ipad is what the most powerful muti-touch device consumer can buy ..And Apple is really knowing what they are doing with ipad. Ipad is for giving us the fresh new touch experience that desktop cant give. Apple knows ipad is for TOUCH...but those ipad killer , they just forgot the true meaning of a tablet device that is supposed to be TOUCHing it the different ways. Those ipad killer uses WINDOWS OS and say they have USB and say they are better ... this is totally bullshit . If I want a windows OS , why dont i buy a notebook? I want ipad to enrich my experience on touch..I want especially designed apps for better interacting very nicely with my 11 muti-touches! That is what a tablet meant to be here .



    This is why i am proud of being an ipad and iphone user.



    Tell me what other device gives you this powerful muti-touches...I believe NONE. the real "quietly brilliant" is apple instead!



    Apple , I LOVE U! Thank for teaching me the true meaning of TOUCH.
  • Reply 7 of 90
    giosacconegiosaccone Posts: 121member
    Apple, good work!
  • Reply 8 of 90
    wovelwovel Posts: 956member
    Quote:
    Originally Posted by AppleStud View Post


    Who is this idiot writing these analyses? Anybody with an accounting 101 class under their belt could do this.



    I would be interested in a link to your analysis. Perhaps your 101 is a summer course.
  • Reply 9 of 90
    Quote:
    Originally Posted by lkrupp View Post


    It's great to see Apple having its day once again, finally. Way back in 1982 I purchased my first Apple product, an Apple II+. Back then there were literally dozens of personal computers on the market, names the younger crowd have never heard of. I looked and looked and looked at most of them. It was plainly obvious that the Apple II+ stood head and shoulders above the rest in quality, features and design. It was also significantly more expensive. I thought long and hard and decided to pay my very first so-called Apple tax. I have never regretted that decision. Not once!



    For those who weren't even born then the Apple II+ was headless and shipped with 48 kilobytes of ram. It was a one piece design with an integrated keyboard. The price for this beauty was $1295.00. You used a standard television as a monitor and a cassette tape player to input programs. When the Disk II arrived it was $695.00 for a storage capacity of 150 kilobytes on a single sided 5.25 inch floppy diskette.



    To this day I believe Apple products to be superior to anything else on the market.



    It is no surpise for me as apple is really the leader.. look at how advanced ipad is in muti-touch , ipad supports up to 11 muti-touches while iphone supports up to 5 which is super responsive and accurate. Ipad is what the most powerful muti-touch device consumer can buy ..And Apple is really knowing what they are doing with ipad. Ipad is for giving us the fresh new touch experience that desktop cant give. Apple knows ipad is for TOUCH...but those ipad killer , they just forgot the true meaning of a tablet device that is supposed to be TOUCHing it the different ways. Those ipad killer uses WINDOWS OS and say they have USB and say they are better ... this is totally bullshit . If I want a windows OS , why dont i buy a notebook? I want ipad to enrich my experience on touch..I want especially designed apps for better interacting very nicely with my 11 muti-touches! That is what and why a tablet meant to be here .



    This is why i am proud of being an ipad and iphone user.



    Tell me what other device gives you this powerful muti-touches...I believe NONE. the real "quietly brilliant" is apple instead!



    Apple , I LOVE U! Thank for teaching me the true meaning of TOUCH.



    So, HP slate = Ifail ....
  • Reply 10 of 90
    MacProMacPro Posts: 19,379member
    As with melting glaciers, the demise of Microsoft will accelerate. I doubt this will be a linear event.
  • Reply 11 of 90
    MacProMacPro Posts: 19,379member
    Quote:
    Originally Posted by AppleStud View Post


    Who is this idiot writing these analyses? Anybody with an accounting 101 class under their belt could do this.



    In my experience the professional trolls (i.e, those with deep understanding and probably paid by MS, RIM et al) avoid the really good AAPL news like the plague.
  • Reply 12 of 90
    elbelb Posts: 6member
    This is generally a good (if slightly over enthusiastic) article, but I must take issue with some terminology. Apple passed Microsoft in Apple's 3rd fiscal quarter which was LAST quarter, not THIS quarter (THIS quarter, the one we're currently in, is Apple's 4th fiscal quarter and results from THIS quarter won't be posted until October).



    Finance is confusing enough without adding these mix ups.



    Otherwise, I'm a happy (AAPL owing) camper...
  • Reply 13 of 90
    Quote:
    Originally Posted by raymondinperth View Post


    This is why i am proud of being an ipad and iphone user.

    Apple , I LOVE U! Thank for teaching me the true meaning of TOUCH.



    I think you mean touched, as in touched in the head!



    At least we know why there was no iPhone 4 recall. Steve Mobs doesn't want to be second banana to monkey boy so we have to keep the numbers up.



    Too bad these figures don't include the iPhone 4 and iPad return rates. No one will ever see those. Apple wouldn't want freak out the fanboi community by reveiling how many people return the iPhone 4 that can't hold a call and the flashless iPad that can't render 75 percent of the Internet.



    We must be drinking some columbian kool aid to believe Apple is beating Microsoft at anything.
  • Reply 14 of 90
    MacProMacPro Posts: 19,379member
    Quote:
    Originally Posted by elb View Post


    This is generally a good (if slightly over enthusiastic) article, but I must take issue with some terminology. Apple passed Microsoft in Apple's 3rd fiscal quarter which was LAST quarter, not THIS quarter (THIS quarter, the one we're currently in, is Apple's 4th fiscal quarter and results from THIS quarter won't be posted until October).



    Finance is confusing enough without adding these mix ups.



    Otherwise, I'm a happy (AAPL owing) camper...



    It will be very interesting to see what this quarter shows. If this is a trend or an anomaly. The FUD over phone reception may cause a false dip for Apple so we may have to wait a few quarters to see a true trend. My guess is MS is five years away from irrelevancy.
  • Reply 15 of 90
    andyzakyandyzaky Posts: 72member
    Quote:
    Originally Posted by elb View Post


    This is generally a good (if slightly over enthusiastic) article, but I must take issue with some terminology. Apple passed Microsoft in Apple's 3rd fiscal quarter which was LAST quarter, not THIS quarter (THIS quarter, the one we're currently in, is Apple's 4th fiscal quarter and results from THIS quarter won't be posted until October).



    Finance is confusing enough without adding these mix ups.



    Otherwise, I'm a happy (AAPL owing) camper...



    Yea. This is why everyone should be on the calendar year. We're talking about the 3-month period ended June 30th. Which is the SECOND quarter. So despite Apple being in Q3 and Microsoft in Q4 on the fiscal year, they're both in Q2 on the calendar year. That's where we're comparing them. On the calendar quarter. THIS quarter during earnings season is Q2.



    No one speaks in terms of "THIS" quarter as in Q3. They're referring to Q2 within the context of an earnings preview.



    If you want to compare them on the fiscal year, you look at their overall revenue and earnings on the year. But the two companies aren't comparable on the fiscal quarter unless you want to spend your time referring to each of their quarters in different time periods. NO one does this in finance.
  • Reply 16 of 90
    addicted44addicted44 Posts: 826member
    This is a shareholder viewpoint comment.



    Apple has shown a stunning ability to invent markets where none existed before. The iPhone when it was released simply added to revenue. The same is true of the iPad.



    This in direct contrast to:

    1) Microsoft - They have been milking the same product for years. Even their "successful" new products are not successes from a shareholder's POV, since XBOX, Bing, etc. are all draining money.

    2) Google - They have only been a 1 trick pony so far. They have not made money on anything yet, except search ads. Even their entry in mobile ads (which looks like only the 2nd area where they could create a decent revenue source) is widely regarded as an extremely overpriced entry. Besides, it got devalued almost instantly because it spurred Apple to create iAds. Additionally, Google is great at sucking value out of markets. A prime example is GPS location systems.



    In effect, they are doing what MS tried to do with IE, but on a much larger scale. They are giving away products at a loss to sustain their 1 revenue generating (and not surprisingly, proprietary) product, search. MSFT was similarly giving away IE so they could keep users within the MS ecosystem. (although, MS screwed up by illegally using their monopoly to force hardware makers to bundle it in. Google has smartly stayed away from illegal procedures like those)





    What happens when Apple releases the iOS based Apple TV?
  • Reply 17 of 90
    anantksundaramanantksundaram Posts: 20,224member
    Quote:
    Originally Posted by Wovel View Post


    I would be interested in a link to your analysis. Perhaps your 101 is a summer course.



    aargh... response to the wrong person! (deleted; see below).
  • Reply 18 of 90
    anantksundaramanantksundaram Posts: 20,224member
    Quote:
    Originally Posted by AppleStud View Post


    Who is this idiot writing these analyses? Anybody with an accounting 101 class under their belt could do this.



    Cut the snark, man. Yes, what Zaky covers here is not rocket science, but it is nice to have different perspectives and issues covered on AI.



    More important, if you're so darned smart, write something on the topic and submit it to AI for publication. Shut up, o/w.
  • Reply 19 of 90
    cameronjcameronj Posts: 2,357member
    What a terribly written article! Could he repeat himself more? And does he think that hyperbole makes his points stronger?



    "Such arguments not only reek of the highest level of financial irrationality, but they are also rooted in a dangerously mislead ideology. "



    Really? THAT in response to the suggestion that Apple and Microsoft are not similar companies operationally? Talk about drinking the Kool Aid. This guy is in love.
  • Reply 20 of 90
    paulmjohnsonpaulmjohnson Posts: 1,380member
    Quote:
    Originally Posted by SDW2001 View Post


    That's because you're ignorant, apparently. Try this thing called "Google." It's magical.



    What a horrible thing to say. It's not ignorant to ask for clarification about something you might not know.



    Mindlessly insulting someone is reasonably ignorant however.



    Quote:
    Originally Posted by rbonner View Post


    While doubts as to whether Apple (AAPL) deserves to hold the second largest market cap in the U.S. continue to mount





    Do you have references to the above, have not read anything on this.



    Here's an article from a couple of months back that details:



    http://www.businessweek.com/news/201...-update3-.html
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