AAPL is significantly overvalued; current price $316 vs fair value $212 implies ~30% downside risk.

Apple and Microsoft have taken radically different approaches to the artificial intelligence boom . Meanwhile , Apple has largely stayed out of this AI boom, while signing some licensing deals with companies such as OpenAI and Alphabet.

So, given these two very different approaches to the AI boom, which of these two companies is the better stock to buy right now? Over the past decade, Apple and Microsoft have done an excellent job of increasing revenue.

Apple's revenue rose to $466 billion over the past 12 months. This represents an increase from approximately $200 billion in 2017.

Furthermore, Apple is preparing to hold an event where rumors suggest it will announce a foldable smartphone. This could be the next catalyst to boost sales growth in the highly important iPhone category.

The iPhone is the entry point for many consumers into the Apple ecosystem, where they later purchase complementary products such as services, Apple TV, the watch, headphones, etc.

At the same time, Apple's operating profit margin is also expanding from about 27% to over 33%. Apple has two main components in its business: the hardware and software side, or it can be called the hardware and services side.

Hardware sales generate gross profit margins of approximately 30% for Apple, while service sales generate profit margins of 70% for Apple. In the last decade, its services business has grown to become a larger proportion of its total business, thereby boosting its profitability.

Now, things are reversed when we look at the return on invested capital, because this figure combines the amount of capital that the company invests in its business with the amount of profit that the company makes.

The operating profit margin we just looked at directly excludes that, although it falls under it indirectly. But this is a more direct measure of the amount of capital a company generates compared to its profitability, and here Apple undoubtedly excels.

With a return on invested capital exceeding 70%, this figure is roughly three times what it was 10 years ago. Apple is known for relying entirely on external partners for its manufacturing processes.

It focuses primarily on research and development, product innovation and marketing.

Now, more recently, this strategy has begun to face some questions. The lack of memory and storage space used in these consumer electronics has led to a sharp rise in their prices.

Apple has been forced to raise the prices of many of its products, with CEO Tim Cook even saying that an increase in iPhone prices is inevitable.

If Apple had a vertically integrated supply chain and manufactured these components internally, it would not have been exposed to these supply chain risks.

Apple has benefited from this business model for almost its entire history, and it is only recently that this strategic choice and its risks have begun to emerge clearly .

Apple shares are trading at a forward price-to-earnings ratio of 33, which is more than 50% more expensive than Microsoft shares, which are trading at a forward price-to-earnings ratio of 21.7 .

I also calculated Apple's fair value and concluded that it is $212 per share . Compared to the current market price of $316, Apple stock appears to be significantly overvalued, and there seems to be a substantial downside risk of around 30%.