News : Can Apple take Microsoft's perch atop tech pile?

By Gabriel Madway - Analysis

SAN FRANCISCO (Reuters) - Apple Inc's (AAPL.O) phoenix-like rise from the ashes has propelled its market value to $180 billion, raising the possibility that it could challenge Microsoft Corp (MSFT.O) for the technology crown.

Microsoft is now the world's most valuable tech company with a commanding market capitalization of $250 billion. Its Windows software is in nine out of 10 personal computers.

It would take impressive execution for any company to unseat Microsoft at the top of the technology heap. But Apple, flush with cash and fat margins, has catalysts in the iPhone, the Mac PC and a highly anticipated but unconfirmed tablet device expected to launch next year, analysts and investors say.

"Apple's revenue growth continues to outpace, driven by market-changing innovation and sticky software offerings that lead to repeat purchases," said David Dillon, a portfolio manager at HighMark Capital Management, which owns both Apple and Microsoft shares.

He said Microsoft is more of a value-based play, with "a strong product cycle coming with Windows 7."

Apple's revenue is still far smaller than that of its arch nemesis, but it is growing at a more rapid rate. Apple's annual revenue has more than doubled since 2005 to $36.5 billion, with earnings per share up more than four-fold to $6.29.

Over the same period, Microsoft's revenue has risen 47 percent to $58.4 billion, with EPS up 45 percent to $1.62.

Barton Hooper, an analyst with Weitz Funds, which owns shares of Microsoft but not Apple, called the giant software company a "moderate growth story" with a strong balance sheet.

"The rate of growth of Microsoft isn't happening nearly as fast as it is for Apple," he said. But he noted that Microsoft still has solid growth drivers, such as the corporate PC refresh cycle and its server and tools business.

Apple trades at around 24 times forward earnings estimates, as does Google Inc (GOOG.O), which has a similar market capitalization and is viewed as another potential challenger to Microsoft. Microsoft trades at roughly 16 times forward earnings.

(For a comparison of the companies' performance since 2005, see here)

THE REBIRTH OF APPLE

Apple's last quarterly results blew past Wall Street estimates and sent its shares to a record-high $208.71.

While the stock has retreated in recent weeks in a broad market pullback, analysts have a price target as high as $280 on Apple, which would give it a market value of $250 billion.

Following its quarterly report last month, analysts also boosted their price targets on Microsoft to as high as $36, which would take its market cap to $320 billion.

Apple is now visible in Microsoft's rearview mirror, but a decade ago the picture was far different.

Both companies were born in the 1970s at the dawn of the personal computer era. But by the late 1990s, Apple was struggling with annual losses, management turmoil and layoffs as the company worked to improve its operating system. Meanwhile, Microsoft was at the height of its dominance.

In 1997, after years of legal wrangling, Microsoft invested $150 million in Apple -- which angered some of the Apple faithful, but which sent Apple shares up more than 30 percent.

At the end of 1998, Microsoft was the most valuable company in the world with a market cap of around $270 billion, according to an annual ranking compiled by the Financial Times. Apple was scarcely on the radar, valued at roughly $5 billion.

But after the return of Steve Jobs, Apple's fortunes began to improve. The company branched into consumer electronics and entertainment, and the phenomenal success of the iPod, iTunes and, in the last two years, the iPhone has remade Apple into a leading light of the technology world.

Erick Maronak, chief investment officer for the Victory Large Cap Growth Fund, said he would not be surprised to see Apple's market cap approach Microsoft's in the next two years, though he also likes the software company's growth prospects.

"The biggest overriding reason why the company still has room to run is that its business is growing ... The day they introduce the tablet, that's going to drive a lot of earnings," said Maronak, whose fund owns shares in both companies.

Apple's shareholders have been handsomely rewarded over the past decade, with its stock up close to 900 percent. Over the same period, Microsoft's shares have fallen around 35 percent.

Investors and analysts repeatedly point to Apple's robust cash generation -- perhaps even more than its track record for innovation -- as a reason for the stock's rich valuation.

Apple's cash flow from operations was $3.1 billion in its most recent quarter, and it sits on a war chest of $34 billion in cash and marketable securities, with no debt, the equivalent of around $37 a share in cash.

Low interest rates and conservative tax decisions on offshore cash have helped to "collectively understate Apple's reported earnings power relative to its peers," according to a research note by Sanford Bernstein analyst Toni Sacconaghi.

"We believe on a cash flow basis the stock remains attractively valued and that earnings estimates are likely to continue to increase going forward," he wrote.

(Reporting by Gabriel Madway, editing by Tiffany Wu and Gerald E. McCormick)