Are we Topping Out? – MSFT vs AAPL
* Hardware vs. Software
* AAPL – chip shortage and Delta could spoil the party
* Microsoft – can it dominate the “intelligent” cloud?
Both Apple and Microsoft will report after the bell today and in a redux of the 1980’s investors are wondering which technology behemoth will beat expectations and lead the post earnings reaction play. Of course AAPL and MSFT are radically different companies then they were at the start of the PC era, but at their core one remains a hardware company and the other a software one.
Hardware vs. Software
Granted that this is a gross oversimplification of the state of business for both companies as MSFT has a massive franchise in gaming consoles with Xbox while AAPL now derives a significant percent of revenues from service revenue such as it app store, yet the primary catalysts for growth for each company is hardware for Apple and software for Microsoft.
Both companies trade at approximately 34 times earnings so it will be interesting to see how the market reacts to today’s earnings news given the dramatically different set of challenges each company faces.
AAPL – chip shortage and Delta could spoil the party
Apple has been able to report stellar earnings in the past six months beating analysts estimates by more than $20 Billion. As a result market expectations have skyrocketed with Wall Street looking for $74 Billion in sales in Q3 and an EPS of $1.01 per share. Whisper numbers are even higher at possibly $77 Billion in revenue and $1.17 per share in earnings. Apple has a long history of sandbagging its estimates to beat expectations but two things stand in its way this time that are outside of ist control – chip shortage and the spread of the Delta variant. Both factors may have dampening effects on its results with the company already warning that it may take a $3-$4 Billion hit in revenue from supply constraints. The impact of Delta variant on retail trade and traffic especially in EM markets such as India, Malaysia and Indonesia is unknown but chances are that it may have curbed some demand.
Microsoft – can it dominate the “intelligent” cloud?
With respect to Microsoft all eyes will be on the company’s cloud business which is quickly becoming the core driver of growth for the giant. Microsoft from its very beginning has been an infrastructure company of the tech space first with its monopoly dominance of OS and now with its very strong presence on the cloud. Of great interest to investors will be MSFT’s growth in Business Process Automation and intelligent cloud services. In short, if the company can show that it is moving away from basic cloud services sales model to a more consultative and value added approach of designing and leasing valuable business software services off its platform investors may react positively to the possibility of margin growth.
On the surface AAPL is the much more glamorous company of the two as it continues to retain its chokehold on consumer tech and the promise of the release of Iphone 13 in the fall could generate enough excitement to push the stock to fresh all time highs, but underneath the glamour MSFT yeoman and steady work on capturing more and more of the public cloud market could in the end make that business a stronger cash cow as the company maintains its history of being the infrastructure play for high tech.
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