Microsoft Aims to Become the World’s Most Valuable Company

Investors are perceiving Microsoft Corp. as a more promising investment option in the stock market compared to Apple Inc., as the software giant demonstrates stronger growth potential and significantly lower exposure to risks associated with China.

Shares of the Redmond, Wash.-based company have outperformed the iPhone maker this month, bringing its market value closer to that of Apple, which is at the center of a flare-up in tensions between China and China. While hundreds of billions of dollars still separate the two companies, Microsoft’s presence in markets including cloud computing and artificial intelligence make it more attractive to some investors.

“Microsoft has more of what the market wants right now, and given where we are in terms of growth prospects for the pair, we wouldn’t be surprised to see it overtake Apple,” said David Klink, senior equity analyst at Huntington Private Bank.

“We believe more in Microsoft’s margins, while cloud and artificial intelligence are growth areas that will last for more than a decade. We don’t know if the iPhone can do the same,” he said. “It’s hard to make a bear case for Apple because of its services business, but the bull case clearly favors Microsoft.”

Microsoft shares fell 0.6 percent on Tuesday, while Apple fell 0.1 percent. The Nasdaq 100 index fell 0.6 percent.

The last time Microsoft was bigger than Apple was in November 2021. Apple’s market cap is close to $2.8 trillion, down from a peak of nearly $3.1 trillion, but still above Microsoft’s $2.4 trillion. While Apple shares have fallen this month, Microsoft has held firm, narrowing the gap between the two to about $200 billion at one point last week.

Favoring Microsoft over Apple is quite common on Wall Street. The company’s recommendation consensus—the ratio of its buy, hold, and sell ratings—is well above Apple. Almost 90% of Microsoft’s analysts recommend buying the stock, compared to less than two-thirds of Apple’s.

While neither stock is particularly cheap, Microsoft’s growth prospects may make it easier to justify its valuation of 29 times estimated earnings. The software giant’s revenue and net earnings per share are expected to grow by double digits in 2024 and the following three years. This consensus reflects the strength of the company’s cloud computing business, and investors are also enthusiastic about its support for OpenAI, the fast-growing startup behind ChatGPT.

Microsoft Windows is taking a subtle approach to adding artificial intelligence: Tech Daily

Apple has achieved three consecutive quarters of negative revenue growth, and a fourth – as analysts expect – would represent its longest streak in two decades. While it’s expected to turn positive in Apple’s 2024 fiscal year and continue to grow over the next two years, the rate isn’t expected to be nearly as strong as Microsoft’s, according to data compiled by Bloomberg.

The iPhone maker “looks like an old IBM,” wrote Bernstein analyst Toni Sacconaghi. International Business Machines Corp.’s “strength in mainframes and related account management once seemed undeniable,” Sacconaghi noted, warning that “Apple’s main risks are that the iPhone will be replaced by a new computing/internet operating platform.”

That new one could be artificial intelligence, the hottest investment theme of the year. Needham recently wrote that Apple could fall to fourth place in U.S. stocks — behind Microsoft, Alphabet Inc and Amazon.com Inc — because it is “not a key beneficiary of the generative AI trend.” Separately, Rosenblatt Securities wrote that Apple’s crown could be threatened by Nvidia Corp, the chipmaker that has been the biggest beneficiary of the artificial intelligence boom so far and is currently less than half the size of Apple.

Apple’s latest device announcements offered few surprises, although there are signs of strong demand. Its efforts to design chips in-house may take longer than expected, while Huawei Technologies Co.’s new phone could be a competitive threat because of government concerns about restrictions on iPhones in China, which accounts for nearly a fifth of Apple’s revenue. Microsoft, on the other hand, gets less than 2 percent of its revenue from China, President Brad Smith told senators last week.

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“Consistency is very valuable given the company’s valuation, and Microsoft has an advantage over Apple right now due to its consistency and projected growth rate,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder. “I like both, but the risk is higher with Apple.”

Today’s technical map

The strong outperformance of Wall Street’s largest stocks has led to a dramatic difference in the returns of tech stocks ranked by size. The S&P 500 technology sector index is up 38% in 2023 from its last close, while the corresponding mid-cap index is up 16%. The index of small-cap technology stocks, meanwhile, is up less than 11 percent this year.

High tech stories

• Grocery delivery company Instacart priced its IPO at the top of the marketed range to raise $660 million in a second marquee listing in a week.
• Microsoft Corp.’s artificial intelligence research team accidentally exposed a large cache of private data on the software development platform GitHub, according to a new study by the cybersecurity firm.
• Alphabet Inc’s Google has adjusted its ad auctions to ensure it meets its revenue targets, sometimes raising ad prices by as much as 5%, a company executive testified Monday in a federal antitrust trial.
• Taiwan Semiconductor Manufacturing Co. and Arizona officials are talking about adding advanced chip packaging capacity to the chipmaker’s factories in the state, Gov. Katie Hobbs said in Taipei on Tuesday.
• SoftBank Group Oyj’s stock fell by as much as 4.3%, the biggest intraday drop in more than a month, as profit-seeking weighed on the shares of newly debuted chip unit Arm Holdings Plc.
• Sen. Ted Cruz argued that the United States must lead the world in artificial intelligence — and it risks losing its edge if Congress imposes “heavy-handed” regulations called for by Democrats and some Republicans.

Earnings due on Tuesday

• Premarket

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