Financial analysis in both investment and corporate finance fields is conducted primarily to analyze available data and monitor an organization’s performance. The quantitative method to assess the operational efficiency, liquidity, and profitability of the company is known as ratio analysis. In their turn, analysts compare ratios of a particular enterprise to those of its competitors operating in the same industry (industry or peer analysis). This practice is also vital to control and measure a company’s performance in a historical perspective by examining them in contrast to those received earlier (trend analysis). Every change in five major categories of ratios explains its effects on current and further conditions of the enterprise. Thus, investors and managers would better off studying the company’s financial statements.
In the case of Microsoft and its primary rival Alphabet, their tight competition continues in terms of market value. The average share price (ESP) for Microsoft’s stock is significantly lower due to a higher number of outstanding shares. For instance, the Alphabet’s ESP was $1191.22 in 2019, while Microsoft’s price per share reached only $138.06. The same situation can be spotted regarding earnings per share (EPS), where it seems that Alphabet Inc. yields more profit from the investor’s point of view. Its market capitalization of $1.1 trillion is inferior in comparison to $1.7 trillion of Google’s parent at the time of March 2020 (Fonda). The book value per share of both companies hints that their stocks may be overvalued.
The most important difference between the two industry giants is in valuation. For instance, in 2019, Alphabet traded at P/E of 24.23, which is below Microsoft’s multiple of 26.85. The same trend remains in force for 2020, as calculations show the P/E supremacy of Microsoft. According to Healy, other ratios, such as enterprise value to EBITDA, confirm that a company established by Bill Gates trades at a higher valuation. Moreover, the latter has more impressive earnings growth per year that was spotted during the last five years (Healy). In terms of the M/B ratio, Microsoft reached a number both higher than the sector’s average and than its main rival.
Even though Microsoft looks a little bit more immune and higher valued by investors, Google’s parent also remains a good option for investment. Its core business prospects, such as advertising and cloud storage services, may boost future earnings due to a higher demand amid the Covid-19 lockdown. Thus, it seems that Microsoft is overvalued versus Google and has the potential to outperform Microsoft from a long-run perspective. Nevertheless, ratios tell that Microsoft is currently a more convenient choice for investors.
Works Cited
Fonda, Daren. „4 Big Tech Companies Are Larger Than Japan’s Stock Market. Why Investors Should Be Cautious.” Barron’s, Web.
Healy, Will. “Better Buy: Microsoft vs. Alphabet.” The Motley Fool, 2020, Web.