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Is Apple the New Microsoft?


As all 7 billion people on earth know, Apple (AAPL) tanked this past week after the company's holiday quarter and guidance fell short of expectations. No need to rehash the misery. The only question now is whether Apple is just going through a short-term transition or is slowly becoming a modern day version of its long-time nemesis Microsoft (MSFT).

Count investor/ author/ entrepreneur Carol Roth as one of those in the camp that says Apple's best days are behind it. "There is a point in time when these companies become too big to succeed," Roth says. "Apple now is twice Microsoft's size, approximately, and I think it's running into the same issues; it's very hard to get that huge growth when you are so large."

As derided as Microsoft is, it's easy to forget that it's one of the most successful, groundbreaking companies in history. For all the high-profile failures, Mr Softie has dominated its markets for at least the last 20 years. In its fiscal second-quarter, Microsoft earned $6.38 billion on $21.4 billion in sales — a nearly 30% net margin selling products no one seems to like.

Microsoft is sitting on more than $68 billion in cash and short-term investments. In its Q2 Microsoft spent $1.7 billion on buybacks, $1.93 billion on dividends, $311 on acquisitions and nearly a billion on capital assets, but it still added $1.67 billion to its coffers.

Despite it all, Microsoft's stock hasn't gone anywhere for a decade. It's not just a matter of failed new products. Microsoft could churn out a hundred Surface-type failures a year without denting the balance sheet. The problem is that there isn't anything Microsoft can do to move the needle on all those amazing numbers.

Consider video games. Since 2001 Microsoft has sold more than 50 million copies of Halo. When Halo 4 was released last November it generated nearly a quarter of a billion dollars in 24 hours. The gaming industry makes the movie business look like a lemonade stand, and Microsoft is the dominant player. Investors couldn't possibly care less.

Apple is a money-printing machine. If they never sold another iPhone or iPad, the iTunes store would still crank out billions in profits. But the market looks forward and it's going to be all but impossible for Apple to retain its share of the smartphone or tablet industries. That's the problem with inventing wildly profitable products — everyone starts gunning for you.

The burden of proof isn't on bears who are skeptical that Apple can keep cranking out must-have products with enormous margins. Apple became the "Best Company on Earth" by taking the title from Microsoft. If Apple can't keep defending that title with hotter and better offerings, it's going to become what Microsoft is today: a money-printing machine with an absolutely dead stock.