Will Microsoft Be Worth More Than Apple by 2025?

Microsoft (MSFT) -1.27%) and Apple (AAPL -1.51%) both again became high-growth companies under visionary CEOs. After taking the helm at Microsoft in 2014, CEO Satya Nadella set the tech giant in a new direction by expanding its cloud-based services while reducing its reliance on desktop software. Microsoft developed more mobile apps for iOS and Android, launched new Surface devices, expanded its Xbox gaming business, and left the struggling Windows Phone platform.

Apple stagnated for years before Steve Jobs returned as CEO in 1997. Jobs’ tenure — which lasted until his death in 2011 — disrupted the PC, digital media player, smartphone and tablet markets with the iMac, iPod, iPhone and iPad. Jobs’ successor, Tim Cook, continued to expand Apple’s hardware business with the Apple Watch, AirPods, and HomePod, while expanding its sticky services ecosystem to include Apple Pay, Apple Music, Apple TV+, Apple Arcade, and other new services.

Image source: Getty Images.

Microsoft and Apple have delivered huge profits for investors who believed in those transformations. Shares of Microsoft are up about 570% since Nadella’s first day. Meanwhile, Apple’s stock has skyrocketed 78.770% since Jobs returned to the position of CEO.

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The market caps of both tech giants have crossed the $1 trillion mark in recent years. Microsoft’s valuation eclipsed Apple’s many times over during that surge, but Apple’s current market cap of $2.5 trillion now places it well above Microsoft’s $1.8 trillion valuation. Can Microsoft catch up with Apple within the next three years?

The main differences between Microsoft and Apple

Microsoft gets most of its revenue from its software and cloud-based services, while Apple makes most of its money by selling hardware. At Microsoft, the key metric to watch is cloud revenue, which grew 32% to $91 billion in fiscal 2022 (which ended in June), or 46% of revenue. This segment houses Office 365, Dynamics and Azure – the world’s second largest cloud infrastructure platform after Amazon Web Services (AWS). Recently, it has managed to offset slower growth in its desktop software and Windows licenses.

As for Apple, most investors are tracking iPhone sales, which generated 54% of revenue in the first nine months of fiscal 2022 (which ended in June). They also closely monitor service revenue, which represented 19% of revenue over that period and reached more than 860 million paid subscriptions at the end of the third quarter. The bulls believe that the growth of that ecosystem of services will lock users into Apple’s walled garden and gradually reduce reliance on the iPhone.

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Which company has grown faster?

Microsoft’s business is more diversified than Apple’s. The Surface and Xbox businesses are cyclical, but those two hardware divisions are much smaller than the core software and cloud-based service segments. Meanwhile, Apple’s growth still relies heavily on rigid hardware upgrade cycles, which have gradually gotten longer with each generation of faster devices. It is also more exposed to chip shortages, supply chain disruptions, tariffs and rising labor costs than Microsoft.

Therefore, analysts expect Microsoft revenue to grow at a compound annual growth rate (CAGR) of 13% from fiscal 2022 to 2025, while only expecting Apple revenue to grow at a CAGR of 5% from fiscal 2021 to 2024. They also expect Microsoft earnings per share (EPS) to grow at a CAGR of 13% over that period. On the other hand, they expect Apple’s earnings per share to rise at a CAGR of 7%.

We should take those estimates with a grain of salt, as they probably don’t factor in Microsoft’s plans to aggressively expand its gaming business with more acquisitions or Apple’s long-rumored AR and VR devices. However, they clearly suggest that Microsoft’s cloud business will continue to thrive if Apple’s hardware sales cool down again.

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Microsoft could easily overtake Apple again

Based on those expectations, Microsoft’s stock should trade at a premium to Apple’s stock. However, Microsoft is trading at 25 times future earnings, while Apple has a slightly more expensive price-to-earnings ratio of 26x.

We could argue that valuations of both stocks have been boosted by the flight to safer blue-chip tech stocks during the ongoing bear market, but investors also seem to be praising many of Apple’s rumors — including AR gadgets and driverless cars — too. in its share price. Therefore, Apple’s stock probably deserves to trade at a lower multiple than Microsoft’s. If those valuations are reset in the coming years, Microsoft could easily become more valuable than Apple by 2025.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, serves on the board of directors for The Motley Fool. Leo Sun has positions in Amazon and Apple. The Motley Fool holds positions in and recommends Amazon, Apple and Microsoft. The Motley Fool recommends the following options: Call $120 long on Apple in March 2023 and call $130 on Apple short in March 2023. The Motley Fool has a disclosure policy.

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