Inter company analysis

Apple Inc, Alphabet Inc, and Microsoft Corporation

The three companies chosen are all listed on NASDAQ. These are Apple Inc, Alphabet Inc, and Microsoft
Corporation. Apple and Alphabet are taken as a component of NASDAQ while Microsoft is taken as an
S&P500 company.

Apple is a computer manufacturing company, which over the years expanded in software, cloud
computing, smartphones, and gadgets market. It is among the second largest company in the world in
terms of market cap at $915 billion (NASDAQ, 2019) and is the most valued brand (Interbrand, 2019).
The company was incorporated in 1976 (Apple, 2019) which makes it 43 years old. The company has
expanded its product line over the years, now it is in the computer hardware and software industry,
consumer electronics, digital distribution, Artificial Intelligence and has different competitors in different
markets. It faces competition from Microsoft in the personal computer’s operating system market. In
laptop and PC segment, major competitors are Dell, HP, Lenovo, Dell, and Asus. In the high-end
smartphone segment, major competitors are Samsung, Huawei, and Sony. Apple’s gadgets face
competition from a lot of international players across different markets. The Business stage of apple is
between growth and maturity because it has a lot of diversified products and for some like the
smartphone and computers the domestic market is saturated but there is a lot of opportunity in
emerging markets. Further, apple deals in some products like watch and iCloud, whose market is on
growth. Apple’s strategy for developing international market is to target emerging markets like China,
India and other Asian countries where its popularity is increasing. It also focuses on providing easy
interface through its iOS and Mac OS which attracts customers who like the easy interface. The company
has faced a lot of patent challenges which implies a vulnerability.

The alphabet was incorporated in 2015 but the incorporation was just a restructuring of its main brand
Google. Google was established in 1998 (Yahoo Finance, 2019), the company is 21 years old
headquartered in mountain view California (Alphabet, 2019). The company is a conglomerate that has
diverse portfolio if high-tech companies like Google, YouTube, Android, Pixel, maps, and many more
products. It is fourth largest company in terms of market cap at $800 billion (NASDAQ, 2019) and world’s
second most valued brand (Interbrand, 2019). The company’s main competitors are Microsoft and
Yahoo in the search engine market. It gets competition from various players in different markets, for
instance, Apple for its Mobile OS Android, Google Music, and Maps, Amazon in voice search and smart
speakers. The business stage of the company is between growth and maturity as it is a global company
innovation is to the core of the company. Its market in the US for search engine and Android platform is
matured but the continuous launch of new products allows it to expand and the emerging markets in
Asia, Africa, and South America possess potential growth for the company. The strategy of Alphabet is
innovation through technology. It improves its existing products and launches products for many new
segments that make people's life easy as claimed by the company. The ethical challenge that the
company faces is that it has a lot of data that is prone to abuse and the AI that can be used for excessive
monitoring, interference, and surveillance. Further, its search engine is also alleged for business,
manipulating results, and giving priorities to sponsored websites (Forbes, 2019).

The third company selected from the pool of S&P500 is Microsoft. It was incorporated in 1975 and is 43
years old (Yahoo Finance, 2019). The company has seen success in the initial times when its operating
system windows gained popularity and became default OS for most of the Personal Computers
worldwide. The company is in the industry of computer software hardware, consumer electronics, social
networking, cloud computing, internet, and games. Its main competitors are Google, Yahoo, Unisys, and
Apple. The business stage of the company is mature where its windows and office utility software
dominates the global market. The key strategy of the company is to stay on top in providing business
solutions and making its operating system Windows the best in the world. The company has gained its
goodwill back after a strong challenge by Steve Jobs few years back. It has improved its process and now
it is most valued firm in the world (NASDAQ, 2019). The key ethical challenges it faced is the patent war
with the likes of Apple Google and Chinese companies. Its innovations are often challenged by Apple and
it is alleged to launch the low priced products for what Apple innovate. However, the company has
boosted a lot of innovation into its process and R&D after its logo was revamped in 2012 (The Verge,
2012).

The reason for selecting these companies was that these are amongst the largest companies in the
world and performing well over the past many years on all the grounds be it the marketing, innovation,
popularity, their everyday use, stock market performance. This makes them very relevant. Further,
these companies are in technology and they have diversified their product line well. Technology is
considered as the future and growth vehicle (da Rocha Brito, Ciampi, Amaral, Vasconcelos, & Barros,
2016).

Basic statistical Analysis

The annual average return, standard deviation and various measures of the securities are as below:

S&P500 S&P500 NASDAQ NASDAQ NASDAQ

firm firm 1 firm 2
Index Microsoft Index Apple Alphabet
Average monthly 0.97% 2.15% 1.27% 1.47% 1.74%
return
Monthly S.D. 3.20% 5.89% 3.84% 7.50% 5.89%
Annual Return 12.30% 29.08% 16.42% 19.18% 23.07%
Annual S.D. 11.07% 20.39% 13.31% 25.99% 20.40%

The correlation table is as follows:

S&P500 S&P500 NASDAQ NASDAQ firm NASDAQ firm

firm 1 2
Index Microsoft Index Apple Alphabet
S&P500 Index 1.000
S&P500 firm Microsoft 0.554 1.000
NASDAQ Index 0.932 0.567 1.000
NASDAQ Apple 0.500 0.364 0.616 1.000
firm 1
NASDAQ Alphabet 0.551 0.458 0.616 0.273 1.000
firm 2

Risk and Return

As can be observed from the table, the average annual return of Apple, Alphabet, and Microsoft from
June 2012 to June 2019 are 19.18%, 23.07%, and 29.08% respectively which is higher than the market
index return of NASDAQ of 16.42% and S&P500 of 12.30% during the same period. These companies
have performed well over the whole period but in 2015 Apple’s growth was less due to its iPhone design
issues. Further, the standard deviation of Apple, Alphabet, and Microsoft are 25.99%, 20.40%, and
20.39% respectively. It is very high for Apple due to the vulnerability surrounding its marketing strategy.
The share prices were jumping throughout the period. It can be viewed that the volatility of Apple is
high no only in comparison with the market index but with the rest of the selected companies as well.
The volatility of both the Alphabet and Microsoft is in 20s and lower than the return which is a good
indication.

Correlation, Alpha, Beta, and R square

The correlation between Apple’s return and NASDAQ index return is high positive at 0.616 which implies
that the growth in the index will result in growth if Apple’s share price substantially. The correlation is
the same for Alphabet as well; it means the movement in the NASDAQ index will make equal change in
the return of both these companies. The correlation between Microsoft and S&P500 is 0.554 which
implies a moderate relationship. The R square of Apple is 0.3789 or 0.379 (approx) in relation to the
NASDAQ which implies that the 38% variation in Apple’s return is explained by the NASDAQ return. The
R square of Alphabet 0.379 same as the R square of Apple implying 38% change in the company’s return
is explained by NASDAQ return. The correlation and the R square both are same for these companies.
The R square of Microsoft in relation to S&P500 is 0.306, it implies that the 30.60% change in the return
of Microsoft is explained by S&P500 return’s change. It is to be noted that the value of R square is not
high which if read with the low correlation suggests that these companies are largely less-affected by
the movements in the market. It’s not a close bonding and often times can be seen when the large
movements in the market won’t affect these company’s performance and vice versa.

Although, the measures discussed above describes the relationship between the market and the
securities the best measure is the beta coefficient. It takes into consideration the standard deviation and
the correlation at the same time. The beta coefficient of Apple, Alphabet, and Microsoft are 1.20, 0.94,
1.02 respectively. The beta coefficient tells the riskiness of a stock. The risk is high with Apple as has
already been observed in the other measures, the lowest risk is with Alphabet. The risk beta of
Microsoft is 1.02 which implies that the risk associated with the company is almost the same as the
market risk.

Jensen Alpha
The Jensen alpha is a measure that tells us how much extra return a stock has earned taking its riskiness
into the account. The Jensen alpha for Apple, Alphabet, and Microsoft are 22.67%, 21.88%, and 29.62%
respectively. With such high alpha of all the stocks, it can be said that they have performed
outstandingly during the period. The alpha of Microsoft is high due to its high return. The important
observation that can be drawn from here is that although the actual return of Alphabet is high, the alpha
of Apple is more. This is because the beta coefficient of Apple is higher than the Alphabet’s.

The current price of these companies based on the above calculations is said to be adequate as the
pricing element includes both the return and volatility component.

The summary of the portfolio construction

The two portfolios are constructed namely portfolio 1 (Apple and Microsoft) and portfolio 2 (Alphabet
and Microsoft). The weight of these assets is determined using the optimal portfolio theory and
calculations which are shown in detail in the excel sheet. The main consideration is given to the return
and the risk element of these assets. The combination of the assets shall be such the return is high and
the risk is low at the same time.

The weight of Apple and Microsoft in Portfolio 1 is 0.28 and 0.72 respectively. The weight of Alphabet
and Microsoft in Portfolio 2 is 0.44 and 0.56 respectively. The expected return, risk and Sharpe ratio are
as follows:

Portfolio 1 Portfolio 2
Microsoft and Apple Microsoft And Alphabet
Expected return 26.31% 26.45%
Expected Risk 7.21% 4.47%
Sharpe Ratio 3.37 5.48

It can be observed from the above table that the return in portfolio 1 and 2 both are almost the same at
26.31% and 26.45% respectively. This is due to the effective weight done through optimal portfolio
management. The risk is also reduced from individual asset, it fell below 10% where the standard
deviation in case of standalone stock was above 10% in all three. In fact, both the return and risk are
optimized, this is the beauty of portfolio. However, the optimization is not the same for both the
portfolio in terms of risk. The risk is high with portfolio 1, this is due to the presence of Apple which is a
highly risky asset, although the weight of the stock is less at 28%, the risk is high compared to the other
portfolio where the risk was moderate. The best way to measure the performance of these attest is the
Sharpe ratio. The Sharpe ratio of these portfolios is 3.37 and 5.48 respectively. The Sharpe ratio is the
measure of excess return to the expected risk, a high Sharpe ratio means a more effective portfolio. The
Sharpe ratio of the portfolio 2 is more, it means it is better.

Step 10 and 11 of the excel sheet determines efficient frontier and capital allocation line. The point at
which CAL intersects Efficient curve it the optimal portfolio. The combination of weight at that point
gives best risk and return combination. Further, Mr. John can select his portfolio anywhere on the line.
Assuming he likes to take risk then it can be said that he will not invest anything in risk-free return. He
will invest all money in portfolio 2 in the combination of weights that is optimal portfolio as per the
graph. Mr. John is a risk-tolerant investor and would not like to invest any of its money in the risk-free
asset, so, he will choose to invest in the optimal portfolio 2, Where the risk, return and Sharpe ratio are
as follows:

EMF and CAL - Portfolio 2.

40.00%
Portfolio 2
30.00%
Microsoft And Alphabet
Return

Expected return 26.45% 20.00%

Expected Risk 4.47% 10.00%

0.00%
0.00% 5.00% 10.00% 15.00% 20.00%
Sharpe ratio 5.48
Risk
Evaluating three companies
The table showing the comparative stats of these three companies with their competitors is as follows:
Apple Microsoft Samsung Alphabet Yahoo Amazon Microsoft Apple Yahoo
Share Price $202.64 $113.00 $115.73 $1,151.29 $69.52 $1,749.00 $113.00 $202.64 $69.52
Market Cap (billion) $915.00 $1,020.00 $770.00 $798.97 $36.12 $865.46 $1,020.00 $915.00 $36.12
PE ratio 17.21 26.36 NA 23.24 0.07 72.59 26.36 17.21 0.07
PB ratio 9.52 9.96 NA 4.16 0.94 16.29 9.96 9.52 0.94
Price to Cash flow 3.54 8.09 NA 5.39 162 3.43 8.09 3.54 162
Profitabilit measures:
Revenue (billion) $259.00 $125.84 $610.00 $148.30 $0.22 $252.06 $125.84 $259.00 $0.22
Profit Margin 21.50% 31.18% 13.49% 22.34% 0.00% 5.96% 31.18% 21.50% 0.00%
Return on Equity 52.60% 42.21% 12.97% 19.62% -8.31% 27.47% 42.21% 52.60% -8.31%

Apple
The two close competitors of Apple are Samsung and Microsoft. The close competitor in computers
Microsoft enjoys a better PE ratio due to its increasing market cap, the PB ratio is the same and the price
to cash flow ratio of Microsoft is more due to its comparatively lesser sales, still the investors have put
more faith in it. Although the profitability of Microsoft is high the ROE is high with Apple, and with
Samsung both are low but the revenue is high which is through wide global presence and diverse
product line. The PE cannot be an effective measure of comparison but these describe the investor’s
sentiments. It can be concluded that the competition is very high.

Alphabet
The close competitors are Yahoo and Amazon. Amazon is growing very fast over the last decade, its
revenue is almost double of Alphabets. It is ahead in terms of PE and PB ratio which indicates that it
enjoys a high valuation. The data related to yahoo is not accessible and it appeared that it has struck
badly over the past years and despite being a close competitor in the online search world, it stands
nowhere on the financials. Alphabet’s profitability is high but Amazon has better ROE. The valuation of
Amazon seems skeptical and risk with these figures and it can be said that Alphabet is insecure position.

Microsoft
The closest competitors are Apple and Yahoo. As discussed above Yahoo lacs ratio data, the company
stands ahead in comparison with all i.e. PE, PB and price to cash flow ratio. Despite low revenue, the
valuation is high and the historical analysis of stock price reveals that the company has better
profitability as well. So, overall it can be concluded that Microsoft is ahead of its competitors.

The future prospects

Since all the three companies are in growing and maturing stage of business and these are amongst the
largest in the world with a global presence and high growth rate in the emerging markets provided
technology at their core, the future prospects are high. The return for the past seven years that the
report analyze is far more than the risk-free rate of 2% and even much higher than the industry
benchmark. Apple is improving its iPhone and high-end laptops MacBook which has huge demand in
China which is expected to become the largest market for Apple. Microsoft has transformed its windows
and they now compete with Apple’s Mac at par, Alphabet is launching its innovative products day by day
with many acquisitions the company is on verge of growth. The fundamentals of these companies are
also strong and it can be seen from the historical price shifts that these companies will grow in the near
future. The only problem that is apparent is with Apple which grew tremendously from 2003 to 2011
under the leadership of Late Steve Jobs but the same performance is missing thereafter. The company’s
standard deviation is also low and in the short future of 2 to 3 years the view is positive but a lot
depends on these years and the long term projections can not be made with surety. The company has
already lost its smartphone market share to Samsung and Huewae and facing stiff competition with
Microsoft in the windows segment. Overall, the future prospects of all the three companies are bright
but Apple requires close monitoring and conclusion for this company cannot be made with surety.
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