Microsoft pips Apple to top spot

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Daniel Lane - Fidelity Personal Investing

4 December 2018

On Friday Microsoft became the world’s most valuable listed company again, after more than 15 years away from the top spot. And for the die-hard fans the ascent might be that bit sweeter, given who they muscled into second place.

Apple lost its lead amid a prolonged fall in share price over the past few months; the result of investor concerns over the firm’s ability to grow iPhone demand and the overarching threat of trade tariffs on its goods.

But there’s a lot more to it than that. The headlines over the weekend focused mainly on Apple’s tumble from its $1 trillion valuation in September but there’s a bit of a dearth in analyses of what Microsoft is doing so well. While the Windows firm has been motoring along in the background the investment case for the company has largely been ignored in 2018. And if that seems overly dramatic, ask yourself which letter in FAANG stands for Microsoft.

The past few years have swept a lot of investors into conversations around a new tech paradigm but last week is evidence of the enduring power of consistent, dependable cash flow over hype-based success.

What makes Microsoft so consistent?

First, the simple difference between Microsoft and Apple is who they sell to.

While Microsoft certainly has a large retail audience, their biggest business is servers and tools which, unless you’re an IT professional, you’ll probably never hear about.

Fundsmith Equity Fund manager Terry Smith puts it well: “If you work in, or run a business there’s a high chance you are using the Windows operating system and will be upgrading to Windows in future. That’s what we like about Microsoft - that recurrent revenue that it gets from the embedded software we are all committed to using, as IT professionals or as people that work in business.”

For Apple, despite recent plans to broaden its own services businesses like ApplePay, Apple Music and the App store, the company’s main audience is a fickle consumer. Last week I touched on the firm’s need to increase iPhone prices to keep seasonal revenues steady - a tactic made all the more challenging with competition from the likes of Huawei and Google’s Pixel, as well as the everpresent Samsung. When the proposition is reliant on a continuous stream of fashionable innovation as opposed to large, dependable business-to-business contracts, the reward can be big but when the fad ends so can the loss.

Of course this isn’t to say it’s the end of Apple, far from it, but the investment lesson here is that no-one is untouchable. New market entrants will always try to compete away any competitive advantage and if Apple doesn’t transition into business relationships soon enough, the fandom around their products could well dissipate into other brands.

When the price goes up it’s easier to change handsets than your entire company’s IT infrastructure.

Fail well

And second, Microsoft fails spectacularly well. We all know their immense success stories - Windows 95, the Xbox, Microsoft Office - but what about Vista, Windows Mobile or the Zune? In the case of the latter, Bill Gates quickly realised the iPod was lightyears ahead and promptly dropped the Zune to concentrate on other opportunities.

Competitors will always try to take a piece of the pie. Often, it’s about becoming such an intrinsic part of life, business or otherwise, that it’s too much of a headache for a user to choose someone else.

And this might be the new conversation around tech. Arguably the winners from here on in will be the ones embedding themselves into all aspects of our corporate and personal lives, rather than creating beautiful but fleeting products.

Future value doesn’t lie in the mere technology itself but in how it enables businesses to grow and propositions to take off. Have a look at which companies are making your life easier at home and at work and you might get an idea of the companies vying for the top spot next year.

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