Microsoft Eyeing Apple's Spot as the World's Largest Stock

Microsoft Corporation is narrowing the gap with Apple Inc. in the stock market as investors perceive better growth prospects and reduced China-related risks in the software giant.

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Microsoft, headquartered in Redmond, Washington, has outperformed Apple this month, bringing its market value closer to that of the iPhone maker, which has been entangled in escalating tensions with China. While a substantial valuation difference still separates the two companies, Microsoft's dominant positions in markets like cloud computing and artificial intelligence have made it more appealing to certain investors.

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David Klink, Senior Equity Analyst at Huntington Private Bank, commented, "Microsoft has more of what the market wants right now, and given where we stand on the pair’s growth prospects, we wouldn’t be surprised to see it overtake Apple. We have more faith in Microsoft’s margins, while the cloud and AI are growth areas that can stand the test of time over a decade. We don’t know if the iPhone can do the same. It’s hard to make a bear case for Apple, given its services business, but the bull case clearly favors Microsoft."

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On Tuesday, Microsoft's shares declined by 0.6%, while Apple dipped by 0.1%, and the Nasdaq 100 Index saw a 0.6% decrease.

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The last time Microsoft surpassed Apple in market capitalization was in November 2021. Apple's market cap currently stands at nearly $2.8 trillion, down from its peak of nearly $3.1 trillion but still ahead of Microsoft's $2.4 trillion. Although Apple's shares have declined this month, Microsoft's stock has remained stable, closing the gap between the two to approximately $200 billion at one point last week.

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Wall Street frequently exhibits a preference for Microsoft over Apple. Microsoft's recommendation consensus, which serves as a proxy for the ratio of buy, hold, and sell ratings, significantly outpaces that of Apple. Almost 90% of analysts covering Microsoft recommend buying the stock, in contrast to under two-thirds for Apple.

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While neither stock can be considered particularly cheap, Microsoft's growth prospects make its valuation, at 29 times estimated earnings, more justifiable. The software giant is expected to achieve double-digit revenue and net earnings per share growth in fiscal 2024 and the subsequent three years. This consensus reflects the robust performance of Microsoft's cloud computing business, with investors also enthusiastic about its support for OpenAI, the rapidly growing startup behind ChatGPT.

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Apple, on the other hand, is coming off three consecutive quarters of negative revenue growth, potentially marking its longest such streak in two decades. Although positive revenue growth is anticipated in Apple's fiscal year 2024 and the following two years, the rate is not expected to be nearly as robust as Microsoft's, according to data compiled by Bloomberg.

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Analyst Toni Sacconaghi of Bernstein likened Apple to the old IBM, noting that "Apple’s key risks are that iPhone is replaced by a new computing/internet access platform," such as AI, which is currently one of the most prominent investment themes.

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The divergence in performance among tech stocks of varying sizes has become pronounced due to the outperformance of the largest tech companies on Wall Street. In 2023, as of its last close, the S&P 500 tech sector index has risen by 38%, whereas an equivalent mid-cap index has gained 16%. Meanwhile, the index for small-cap tech stocks has increased by less than 11% during the year.

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