Microsoft and Apple Report

By : Heidy Naranjo

BUS 6- A |Class of 2028

Apple and Microsoft are two of the most influential and valuable companies in the technology industry. Both are headquartered in the United States and operate on a global scale, competing and collaborating across different segments of the tech market. They play major roles in innovation, shaping how people interact with software, hardware, and digital ecosystems. This includes the devices we use every day, the platforms that help us stay productive, and the digital services that connect us to the world.

Apple and Microsoft operate within the broader technology sector, focusing on areas like consumer electronics, software, and digital services. This industry is known for rapid innovation, short product lifespans, intense competition, and heavy investment in research and development. Companies have to stay on their toes to constantly adapt to changes in consumer preferences, advancements in tech, and evolving regulations.

Right now, there are many opportunities in areas like artificial intelligence, cloud computing, wearable technology, and virtual or augmented reality. At the same time, the industry faces serious challenges, including cybersecurity threats, supply chain disruptions, and growing government regulation around privacy and competition.

Apple was founded in 1976 and is known for its sleek hardware and well-integrated software ecosystem. Its main products include the iPhone, Mac, iPad, Apple Watch, and AirPods, along with services like Apple Music, iCloud, and the App Store. Apple has built a strong brand around user experience, privacy, and design, which has helped it maintain customer loyalty and justify premium pricing.

Apple primarily targets individual consumers, students, and creative professionals. It competes with companies like Samsung in hardware, Google in mobile software and services, and Microsoft in computers and productivity tools. Recently, Apple has been exploring new areas like virtual and augmented reality through devices like the Vision Pro. At the same time, it faces challenges such as its dependence on iPhone sales, reliance on overseas manufacturing, and increasing pressure from regulators questioning its control over the App Store.

Microsoft was founded in 1975 and originally made a name for itself with its software products, especially Windows and Microsoft Office. Today, the company has a much broader portfolio that includes cloud services through Azure, social networking via LinkedIn, gaming with Xbox, and various tools for businesses and developers.

Microsoft serves both individual users and enterprise customers, and its main competitors include Amazon in the cloud space, Google in AI and productivity software, and Apple in consumer devices. Microsoft’s biggest growth opportunities are in expanding its cloud services, integrating artificial intelligence, and building out its business software ecosystem. However, it must also deal with increasing global regulation, strong competition, and the challenge of continuing to innovate while maintaining trust and security across its platforms.

For Apple, total assets increased by 3.5 percent, rising from $352.58 billion to $364.98 billion. This growth was mainly due to higher accounts receivable and increased investment in property, plant, and equipment, which reflects Apple’s continued expansion in operations and infrastructure. Current liabilities experienced a significant jump of 21.4 percent, increasing from $145.31 billion to $176.39 billion. In contrast, stockholders’ equity decreased by 8.4 percent, declining from $62.15 billion to $56.95 billion. This reduction is likely the result of Apple’s capital return strategy, where dividend payouts exceeded net income for the year.

In the income statement, Apple’s gross profit rose by 6.8 percent, changing from $169.15 billion to $180.68 billion. The increase can be explained by stronger sales in services such as advertising, the App Store, and cloud services. However, net income fell by 3.4 percent, decreasing from $97.00 billion to $93.74 billion. This decline was largely caused by a one-time tax charge of $10.2 billion related to the State Aid Decision, which led to a nearly 10 percent increase in Apple’s effective tax rate.

For Microsoft, total assets grew by 24.3 percent, increasing from $411.98 billion to $512.16 billion. This growth was due to a rise in goodwill and intangible assets, caused by things like acquisitions and other investments in IPs. Total liabilities increased by 18.4 percent, moving from $205.75 billion to $243.69 billion. The growth in liabilities was influenced by higher accounts payable and other current liabilities. Stockholders’ equity showed a quite strong growth of 30.2 percent, rising from $206.22 billion to $266.48 billion. This increase suggests quality retained earnings and equity issuances, highlighting Microsoft’s profitability and reinvestment strategies.

In the income statement, Microsoft’s revenue rose by 15.7 percent, growing from $211.92 billion to $245.12 billion. The increase was driven by strong performance in services, particularly Intelligent Cloud, which saw a 20 percent climb. Gross margin improved by 17.1 percent due to higher revenue.

The DuPont Analysis breaks down return on equity (ROE) to help understand what drives a company’s profitability. The formula for the DuPont Analysis is written in the following:

If you take out the financial leverage portion, net profit margin and asset turnover also give us return on asset (ROA). It is important to understand each part of the analysis and how it generates a company’s ROE. Apple’s main source of revenue is from selling their products, which include the iPhone and Macbook or services like Apple Music and Icloud. As for Microsoft, their revenue is sourced from Azure and Microsoft Office.

Let’s break down the DuPont Analysis, starting with Net Profit Margin. This ratio tells us that for every dollar of net income, how much of it comes from their sales revenue. For Apple, the net profit margin evaluates the income generated for every iPhone that is sold. Asset turnover measures how efficiently a company generates revenue from its assets. For every dollar that Microsoft spends to run its office buildings, how much of it is generated towards revenue? This combination gives you ROA, measuring the ability to generate income from assets. Apple’s ROA FY 2024 was 27.02%, whilst MSFT was 18.19%. Financial leverage is how the company uses its equity to finance its assets. For Apple, it would be developing a new product. All these ratios combined represent a company’s ROE. The ROE ratio analyzes how well a company uses the money that is invested by shareholders to generate income. For every dollar that investors invest in Apple or Microsoft, how much of it is generated towards their profits?

Apple and Microsoft both perform well above industry benchmarks. Microsoft’s ROE was around 37.13%, which is notably higher than the industry’s benchmark of 25.48% for the year 2024. Apple’s ROE for 2024 was 157.41%, significantly higher compared to Microsoft and the industry benchmarks. Apple’s ROE reveals that it can be highly efficient with the use of its shareholders’ equity. Their profit margin and asset turnover also exceed industry benchmarks, revealing that their products are generating enough revenue to apply towards the company's assets. As a result of this analysis, the majority of Apple’s DuPont analysis ratios are at a better level compared to Microsoft. Overall, Apple’s performance is still higher, thus making it a stronger company than Microsoft.

The five ratios to look at are the current ratio, the quality of income ratio, the inventory turnover, the price-to-earnings (P/E) ratio, and the debt-to-equity ratio. Starting with the current ratio, which measures a company's liquidity and ability to pay off its short-term obligations, Microsoft had a ratio of 1.78 in 2022 and declined to 1.27 in 2024, while Apple had a current ratio of 0.88 to 0.87. This indicates that Microsoft is in a stronger liquidity position than Apple, though its declining trend shows a tightening of liquidity over time. Apple's consistently low current ratio suggests they operate with very tight working capital, possibly tied to efficient inventory management and aggressive capital allocation strategies like share buybacks. Next, examining the quality of income ratio, which measures the proportion of income backed by actual cash flows, both Microsoft and Apple showed strong and stable quality with values of 1.22 to 1.26. By 2024, Microsoft’s ratio slightly improved from 1.22 to 1.35, A ratio above 1 indicates high-quality earnings, meaning cash flows exceed net income. Microsoft's improvement suggests even stronger earnings quality, likely reflecting robust cash generation from operations, while Apple’s minor decline still maintains a very healthy cash flow situation. For inventory turnover, which measures how often inventory is sold and replaced over a period, Microsoft posted a turnover of 15.11, increasing to 27.71, indicating a significant improvement in inventory efficiency. Apple recorded a turnover ratio of 33.88 to 29.2. Although Apple’s turnover is higher overall, indicating faster inventory movement relative to Microsoft, the slight decline could suggest slower product cycles or increased inventory buildup.

Regarding the price-to-earnings ratio, which tells how much investors are willing to pay for each dollar of earnings, Microsoft had a P/E of 37.68 to 28.96 by 2024. Apple’s P/E was 35.93 to 35.46. A lower P/E ratio can imply lower market expectations for future growth, or it could signal undervaluation. Microsoft's sharp decline suggests a cooling of investor sentiment or possibly stronger earnings growth that outpaced stock price appreciation. Finally, the debt-to-equity ratio measures a company’s financial leverage. Microsoft had a debt-to-equity ratio of 1.19, dropping to 0.90 in 2024. Apple, on the other hand, had a much higher ratio of 5.96, which decreased to 5.4. While both companies reduced their leverage, Microsoft’s significantly lower ratio suggests a much more conservative and financially stable structure compared to Apple. Overall, Microsoft is better in liquidity, financial stability, and operational efficiency. Microsoft’s conservative financial posture and strong cash flow generation position it well for sustained long-term performance, whereas Apple’s aggressive capital structure may appeal more to investors seeking higher short-term returns.

Apple uses the first-in, first-out (FIFO) method for inventory costing, while Microsoft applies the average cost method, following the lower of cost or net realizable value principle. Both companies use the straight-line method to depreciate property, plant, and equipment over the estimated useful life of each asset. For Apple, buildings are depreciated over the shorter of 40 years or the remaining life of the building. Machinery and equipment are depreciated over one to five years. Microsoft’s estimated useful lives include three years for internally used software, two to six years for computer equipment, five to fifteen years for buildings and improvements, three to twenty years for leasehold improvements, and one to ten years for furniture and equipment.

According to Note 12 – Commitments, Contingencies and Supply Concentrations in Apple’s 2024 annual report, the company reported $11.2 billion in unconditional purchase obligations related to supplier agreements, licensed intellectual property, and distribution rights. These are classified as off-balance sheet commitments, meaning they do not appear as liabilities on the balance sheet but still represent future cash outflows. If these obligations had been recorded, Apple’s total liabilities would appear significantly higher, potentially impacting key financial ratios such as the current ratio or debt-to-equity ratio and possibly altering investor perception of the company’s financial flexibility.

Additionally, Apple disclosed that it is involved in various legal proceedings but stated that it is not reasonably possible that material losses would exceed recorded accruals. This suggests there are no currently recognized contingent liabilities beyond what’s reflected in the financial statements.

In Note 15 – Contingencies of Microsoft’s 2024 annual report, the company disclosed several potential legal liabilities that could exceed the amounts currently reflected on the balance sheet. One significant matter involves an ongoing investigation by the Irish Data Protection Commission concerning LinkedIn’s targeted advertising practices under the European Union’s General Data Protection Regulation (GDPR). This investigation may result in a fine once a final decision is issued, although the timeline for this decision is uncertain. Additionally, Microsoft continues to be involved in a legal case related to alleged health risks from cellular handset radio emissions. The company, along with other handset manufacturers and network operators, faces 45 lawsuits filed by individuals claiming that mobile phone use led to brain tumors and other health issues. These cases are in various stages of litigation, with appeals and hearings still ongoing. Furthermore, Microsoft has accrued $641 million in legal liabilities as of June 30, 2024, but it also acknowledged that additional losses of approximately $600 million are reasonably possible beyond what has been recorded. If these potential liabilities materialize and are recognized in the financial statements, they could significantly increase Microsoft’s total liabilities, potentially impacting its net income and other financial metrics.

In 2023, Apple’s stockholders’ equity was $96.995 billion in net income, $77.046 billion in share repurchases, and $14.996 billion in dividends. Compensation through shares added $11.138 billion toAPIC, while a $343 million loss in other income slightly reduced equity. Microsoft reported $72.361 billion in net income, $18.4 billion in buybacks, and $20.2 billion in dividends, with similar effects on equity. In 2024, Microsoft’s $80.678 billion net income, capital returns, and its $75.4 billion Activision acquisition impacted common stock and paid-in capital, while a $1.2 billion gain boosted other comprehensive income. From a cash flow perspective, Apple generated $110.5 billion in operating cash in 2023 and $118.3 billion in 2024, while outflows from finances grew to over $100 billion each year. Microsoft produced $87.6 billion in operating cash in 2023, spent heavily buybacks, and ended the year with strong liquidity.

The auditor’s report for Apple Inc. reflects a standard unqualified opinion, meaning the financial statements were presented fairly in all material respects by U.S. GAAP. The auditors also provided an unqualified opinion on Apple’s internal controls. Although they highlighted a critical audit matter related to uncertain tax positions due to the complexity and judgment involved, this did not impact the overall clean audit opinion. Therefore, the report is still considered favorable.

The auditor’s report for Microsoft Corporation presents a standard unqualified opinion, confirming that the financial statements were fairly presented by U.S. GAAP. The auditors also expressed an unqualified opinion on the company’s internal controls. While they identified critical audit matters regarding revenue recognition, uncertain tax positions, and business combinations, these did not influence the overall clean opinion. As a result, the report remains favorable.

If we had $500,000 to invest in either Apple or Microsoft, we would invest in Apple. Apple’s ratios in the DuPont Analysis exceed compared of Microsoft because their ratios exceed industry benchmarks a lot higher. For example, Apple’s ROE is 120% higher than Microsoft's. Apple also has a higher ROA of 27.02% compared to 18.19% MSFT. There are areas where Microsoft does exceed. Microsoft has a lower financial risk based on its debt-to-equity ratio because it had a 0.90% compared to Apple, with 5.4%. A higher number of 35.46 in Apple’s P/E ratio indicates that Apple has stronger investor confidence and growth expectations. This means that in the long run, Apple is more reliable.

Nasdaq, a stock exchange market, prices Microsoft at about $391 per share while Apple is priced at about $208 per share. In many cases, Apple is a better buy because the price per share is lower, so investors can buy and own more shares. Over time, as stock increases, investors get a slightly faster return on their investment by purchasing Apple. A Nasdaq article also concluded that Apple was a better investment in the year 2024, “based on the underlying fundamentals and cheaper valuation” (Nasdaq). Microsoft’s position in the market may not be as strong compared to Apple, but they are profitable in the long run. Microsoft has a projected CAGR of 14.27% over the next 5 years. With their cloud engineering and cloud systems, they contribute more to the technology industry and give them a higher growth rate in the market. Apple’s CAGR is only about 8%, but Apple exceeds Microsoft in many more areas. Because Apple has stronger DuPont Ratios, stock market price, and is projected to be a better investment according to Nasdaq, Apple is a more reasonable to invest in.

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