(Bloomberg) -- Microsoft Corp. is narrowing the gap with Apple Inc. in the stock market as investors see better growth and far less China risk in the software giant.
The Redmond, Washington-based company’s shares have outperformed the iPhone maker’s this month, bringing its market value closer to Apple, which is at the center of a flareup in tensions with China. While hundreds of billions of dollars still separate the two companies, Microsoft’s positions 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 stand on the pair’s growth prospects, we wouldn’t be surprised to see it overtake Apple,” said David Klink, senior equity analyst at Huntington Private Bank.
“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,” he said. “It’s hard to make a bear case for Apple, given its services business, but the bull case clearly favors Microsoft.”
Shares of Microsoft slipped 0.6% on Tuesday, while Apple dipped 0.1%. The Nasdaq 100 Index fell 0.6%.
The last time Microsoft was larger than Apple was in November 2021. Apple’s market cap is nearing $2.8 trillion, down from a peak of nearly $3.1 trillion but still above Microsoft’s $2.4 trillion. While Apple shares have dropped this month, Microsoft has held steady, narrowing the gap between the two to roughly $200 billion at one point last week.
A preference for Microsoft over Apple is fairly common on Wall Street. The company’s recommendation consensus — a proxy for its ratio of buy, hold, and sell ratings — stands well above Apple. Nearly 90% of Microsoft analysts recommend buying the stock, compared with under two-thirds for Apple.
While neither stock scans as particularly cheap, Microsoft’s growth outlook may make its valuation of 29 times estimated earnings easier to justify. The software giant is expected to see double-digit growth in revenue and net earnings per share in fiscal 2024 and the subsequent three years. That consensus reflects the strength of the company’s cloud-computing business, with investors also enthusiastic about its backing of OpenAI, the fast-growing startup behind ChatGPT.
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Apple is coming off three straight quarters with negative revenue growth, and a fourth — as analysts expect to see — would represent its longest streak in two decades. While that’s expected to turn positive in Apple’s 2024 fiscal year and continue growing in the subsequent two years, the rate isn’t expected to be nearly as robust as that of Microsoft, according to data compiled by Bloomberg.
The iPhone maker is “looking like the old IBM,” wrote Toni Sacconaghi, an analyst at Bernstein. International Business Machines Corp.’s “strength in mainframes and associated account control once seemed unassailable,” Sacconaghi noted, warning that “Apple’s key risks are that iPhone is replaced by a new computing/internet access platform.”
That new something could be AI, the hottest investment theme of the year. Needham recently wrote that Apple could fall to fourth place among US stocks — behind Microsoft, Alphabet Inc., and Amazon.com Inc. — because it “is not a core beneficiary of the trend toward generative AI.” Separately, Rosenblatt Securities wrote that Apple’s crown could be threatened by Nvidia Corp, the chipmaker that has been the biggest beneficiary of the AI boom so far, and which is currently less than half of Apple’s size.
Apple’s latest device announcements offered few surprises, though there are signs of strong demand. Its efforts to design chips in-house may be taking longer than expected, while a new phone from Huawei Technologies Co. could be a competitive threat amid concerns about government restrictions on iPhones in China, which accounts for nearly a fifth of Apple’s revenue. Microsoft, by contrast, gets less than 2% of its revenue from China, President Brad Smith told senators last week.
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“Consistency is worth a lot when considering a company’s valuation, and Microsoft, because of its consistency and projected growth rate, has an advantage over Apple right now,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder. “I like both, but the risk is higher with Apple.”
Tech Chart of the Day
The strong outperformance by Wall Street’s biggest stocks has led to a dramatic divergence in the returns of tech stocks categorized by size. The S&P 500 tech sector index has risen 38% in 2023, as of its last close, compared with a 16% gain for an equivalent mid-cap index. The index for small-cap tech stocks, meanwhile, has risen less than 11% this year.
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Earnings Due Tuesday
--With assistance from Kit Rees.
(Updates to market open.)
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