Can Apple take Microsoft's perch atop tech pile?

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The rebirth of Apple

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

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

Following its quarterly report last month, analysts also boosted their price targets on Microsoft to as high as USD 36, which would take its market cap to USD 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 USD 150 million in Apple - which angered some of the Apple faithful, but which sent Apple shares up more than 30%.

At the end of 1998, Microsoft was the most valuable company in the world with a market cap of around USD 270 billion, according to an annual ranking compiled by the Financial Times. Apple was scarcely on the radar, valued at roughly USD 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%. Over the same period, Microsoft's shares have fallen around 35%.

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 USD 3.1 billion in its most recent quarter, and it sits on a war chest of USD 34 billion in cash and marketable securities, with no debt, the equivalent of around USD 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.