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Financial Comparison Of Microsoft, Dell, And Apple

Microsoft Computers

Financial Analysis

Microsoft is currently the largest company in the computer industry. With a market
capitalization of $291 billion, Microsoft has built an empire by dominating software sales
for personal computers. Stock growth over the past 25 years has increased by more than
30,000%. However, Microsoft’s growth has substantially decreased since the market
collapse of 2001(Niemond 25 April 2007).

From June 2004 to June 2005, Microsoft saw a 33% growth in net income. However,
from June 2005 to June 2006, growth decreased to 2%. Investors consider net income to
be the leading indicator for a stock price. To illustrate how the changes in net income
affect stock prices, a time line is shown below.
6/30/04 Net income Change $24.65 Stock Growth
12/30/04       $25.89 (04-05)
6/30/05 33% $24.93 1.1%
12/30/05       $25.61 (05-06)
6/30/06 2.4% $23.92 (4.1)%

In Microsoft’s 2004 fiscal year, a 33% increase in net income resulted in a 1% increase in
stock price. In the 2005 fiscal year, a 2% gain in net income resulted in a 4% decrease in
stock price (Microsoft Inc 2006). As seen, an increase in net income does not
automatically lead to an increase in stock price. For growth companies such as Microsoft,
stock price is primarily driven by the growth of earnings (25 April 2007).

Investors in the stock market judge earnings growth against two figures: the average
industry earnings and the estimated earnings for the company. If analysts predict earnings
to be above the industry average, a company’s stock price will usually rise. If companies
report earnings higher than predicted, stock price will typically rise even more.

Since 1991, Microsoft’s earnings per share have risen each year. However, the
percentage increase in these years has been decreasing (13 April 2007). This trend has
not been well received by investors, as indicated by a net 0% change in the stock price
over the past seven years.

The promise of a rewarding return from investing in Microsoft stock will be unlikely if
current trends do not reverse. Because Microsoft derives the majority of revenue through
software sales, the company must either enhance its current products or enter new
markets to remain competitive.
Business Plan

Recent data shows that 78% of computer users use Microsoft Windows as their primary
operating system. Microsoft has also just released a new operating system known as Vista
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that competes primarily with Apple’s Mac OSX.

Van Baker, a marketing analyst, believes that the release of Vista may have pushed
Microsoft closer towards meeting the higher expectations of today’s computer users.
Although, he believes that these expectations may increase even more once Apple
releases its newest operating system, Leopard (Bishop 2006).

The users of the Vista operating system will more likely be drawn from the current users
of Windows, rather than from users of Mac OSX. This may restrict Microsoft’s market
share because the growth of Vista will result in the erosion of Windows. Microsoft’s
market share would remain unchanged if this occurred. Therefore, Microsoft’s short-term
changes seem directed towards sustaining market share rather than growing market share.



Dell Computers Inc.

Financial Analysis

Dell Computers Inc. currently has the largest market share in personal computer
sales. Of the $56 billion dollars in revenue in 2006, Dell generated 66% from the direct
sales of computers and computer peripherals.

From 2005 to 2006, net income grew by 17%, compared to 15% the prior fiscal year.
In 2005, the stock price declined approximately 24% (Dell Computers Inc 2006). This
figure may not be fair considering Dell increased net income growth by nearly
20%. However, the market’s reaction is reasonable since Hewlett Packard, Dell’s closest
competitor, saw net income jump by nearly 160% in the same year (Brophy 13 April
2007).

While Dell’s cumulative record over the long term has been positive, the company has
not been able to recover from the hits taken early in this decade. Dell has grown around
30,000% over a 25-year period. The majority of this growth took place in the
1990’s. Dell, like Microsoft, also took a hit in the 2000 crash. Over the past seven years,
Dell’s stock has declined substantially. In June of 2000, the stock price was
approximately $47. The price is currently around $27 (13 April 2007).

For an investment in Dell to be worthwhile we must look at how the management intends
to change the company’s direction. For many years, Dell relied on its competitive
advantage in providing the best customer service in the industry. Most competitive
advantages, however, cannot be sustained indefinitely. While Dell still remains the
leader in industry sales, HP and Apple are narrowing this gap.

Business Plan

Dell’s management currently shows no intention to introduce any new major new product
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lines. Rather, the company will rely on its strategic business relationships to grow sales.

Dell eagerly anticipates Microsoft’s release of Vista. This operating system will be
standard on new computers sold by Dell. Provided the new operating system is popular,
Dell will likely see a spike in sales.

Dell has also made plans to adjust their distribution channels. The company currently
generates most sales over the phone or Internet. Dell recently announced that it will take
a “bricks-and-mortar” approach by beginning to sell computers in both Sam’s Club and
Walmart stores.

With this move, the company shows a willingness to adapt to the changing demands of
customers. For the past five years, Dell had passively watched their market share erode
to companies selling in retail stores, such as Apple and HP. Consumers have clearly
indicated the desire to be in the physical presence of a computer before purchasing it
(Associated Press 8 June 2007).

Dell may be late in altering their sales strategy, but they have certainly chosen a powerful
retail chain to channel their product through. Walmart, and its subsidiary Sam’s Club,
has remained the world’s largest corporation over the past few years and is known for an
extremely diverse customer base.

The management at Dell has also recognized that a dominant position in personal
computer sales may not be enough to keep the company atop close rivals. Thus, they
have shifted resources into heavily promoting data-storage devices. In the first quarter of
this year, Dell led the market in sales growth of these devices, beating out rivals EMC,
HP, and IBM. To diversify even further, Dell is seeking to acquire companies that
generate revenues through technical support services. Currently, Dell generates 10% of
total sales from service revenue (CNNMoney.com, 6 June 2007).

Apple Computers Inc.

Financial

Apple’s financial trend over the past 25 years has been almost the exact opposite of
Microsoft’s. Through the 1990s, growth was stagnant and market share was nearly non-
existent. When the crash of 2000 hit, Apple suffered substantially more than both
Microsoft and Dell. Apple’s stock price plunged 50% in just a few days. However,
unlike Microsoft and Dell, Apple has fully rebounded since the crash and continues to
grow rapidly.

From 2004-2005, Apple’s net income grew by 380%, compared to 50% in 2005-2006. A
stock price time-line is provided below.

9/30/04     Net income Change $19.38 Stock Growth
3/30/05     (04-05) $42.80 (04-05)
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9/30/05 380% $53.61 176%
3/30/06 (05-06) $62.75 (05-06)
9/30/06 50% $76.98 44%
(Niemond 13 April 2007)

When comparing this chart to Microsoft’s, the importance of net income as the leading
indicator becomes more apparent. A comparison shows that the market greatly rewards
stocks that grow well above the rates of their competitors.

Apple’s stock price has risen 1000% in the past five years, while, Dell’s and Microsoft’s
stock has remained unchanged. However, from the early 1990’s to the early 2000’s,
Apple’s stock grew only 100%. Therefore, in the 1990’s growth averaged 10%, and in
the 2000’s growth averaged 100%. To most investors, this is a highly favorable trend
because the company’s growth is exponential (13 April 2007).


Business Plan

The large increases in sales growth and income over the past five years indicate a well
designed and executed business plan. Apple initially put itself back in the spotlight by
revolutionizing digital audio with the introduction of the iPod. Shortly after, the company
put a new spin on the personal computer with the introduction of the Macbook.

Apple has been able to differentiate its strategy from competitors’ by emphasizing the
needs of the user. For example, market analysts at Apple determined that one aspect of
personal computing that intimidated new users was the set-up and installation
process. Apple responded by introducing the Macbook; a “plug-and-go” computer that
simplified the set up by pre-installing all major software, and reducing the complexity of
external devices. Essentially a user could buy a computer, take it home, plug it in, and
operate it immediately.

Another illustration is their response to customer service needs. Apple recognized that
Dell maintained a competitive advantage over them in customer service by maintaining a
24-hour tech support line that was free of charge. Furthermore, they provided fast, free
shipping on all repairs. Apple copied the customer service function of Dell, but also
added one important feature. Apple’s retail stores now employ staff members to
specifically address customer service needs including technical support, repairs, and
product tutorials.

Apple continues to diversify its product mix. Their most recent addition was
AppleTV. This device allows users to transmit video from their iPods to home
televisions. If Apple can revolutionize digital video the same way it revolutionized
digital audio, the company may be able to create a whole new market for downloadable
digital video.

Furthermore, in one week Apple will release the highly anticipated iPhone. The phone is
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an all-in-one device that combines the features of an iPod, a PDA, and a cell phone. The
phone may have a limited market considering a retail price of approximately $600.




Comparative Analysis

Provided that the Vista software is well received, Microsoft and Dell will likely maintain
their existing market share in personal computing and software. An expansion of market
share will be unlikely. This is because the majority of new users of Vista will be drawn
from existing users of Microsoft Windows.

Apple, on the other hand, continues to find ways to attract new users. In the past month,
Apple made available its Safari Web browser on the Windows operating systems. Over
one million copies were downloaded in two days (Yared 2007).

A major obstacle Apple has to overcome in attracting new users is convincing Windows
users that learning to operate a Mac will not be a complete relearning process. In fact,
Microsoft’s Windows Office operates almost identically on a Mac as it does a PC. Now
that Apple has offered their Internet browser for use on a PC, Windows users may test the
complexity, or lack thereof, of Mac software without actually purchasing a Mac. This is
one step towards easing the apprehensions of PC users.

Further mitigation of this fear has been facilitated by the use of iTunes, Apple’s audio
software used to purchase MP3’s and sync iPods. Not only does Apple dominate the
portable MP3 player market with a 70% market share, but also leads the market in MP3
sales, with more than 2.5 billion songs downloaded (Yared 2007). Most of these
downloads have been initiated from Windows users.

The success of Apple’s release of the Leopard operating system can only help strengthen
their growth. The release of the new system, in conjunction with the release of the
iPhone and new Macbook, are all viable sources of market penetration for Apple.


Conclusion

While Dell and Microsoft are now more focused on maintaining current market share,
Apple continues to focus on increasing market share. Investors favor growth companies
that show increasing trends in earnings. Therefore, because Apple has created multiple
approaches towards increasing earnings, its stock is currently the most attractive among
the three.
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Biliography

Apple Computers Inc. September 30 2006 10-K Annual Report. OneSource. Accessed
June 15 2007

Associated Press, Dell to Sell Computers at Sam’s Club, 8 June, 2007, Words count,

Bishop, Todd. 2006. Apple to Unleash a Leopard Attack. SeattlePI.com. 8 August 2006

Brophy, Theresa. DELL INC. The Value Line Investment Survey. 13 April 2007

CNNMoney.com, Dell Seen Expanding Services. 6 June 2007, Words count.

Dell Computers Inc. March 15 2007 10-K Annual Report. Thompson One Banker,
accessed June 15, 2007

Microsoft Inc. June 30, 2006 10-K Annual Report. Thompson One Banker, accessed
June 15, 2007

Niemond, George A. APPLE INC. The Value Line Investment Survey. 13 April 2007
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Niemond, George A. MICROSOFT. The Value Line Investment Survey. 25 April 2007

Yared, Georges. 2007. 3 Reasons to Buy Apple Now. The Motley Fool, 15 June 2007

				
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