Will Microsoft be worth more than Apple by 2025?

Microsoft (MSFT 0.85%) and Apple (AAPL -0.64%) both have once again become high-growth companies under the leadership of visionary CEOs. After taking charge of Microsoft in 2014, CEO Satya Nadella gave the tech giant 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 games business and ditched its 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 markets for PCs, digital media players, smartphones and tablets with iMac, iPod, iPhone and iPad. Jobs’ successor Tim Cook has continued to grow Apple’s hardware business with Apple Watch, AirPods and HomePod, while expanding its ecosystem of sticky services with Apple Pay, Apple Music, Apple TV+, Apple Arcade and more. other new services.

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Microsoft and Apple generated massive gains for investors who believed in these transformations. Microsoft’s stock is up about 570% since Nadella’s first day. Meanwhile, Apple shares have soared 78,770% since Jobs returned as CEO.

The market capitalization of the two tech giants has surpassed the $1 trillion mark in the past few years. Microsoft’s valuation has eclipsed Apple’s several times during this ascent, but Apple’s current market cap of $2.5 trillion now puts it comfortably ahead of Microsoft’s valuation of $1.8 trillion. . Could Microsoft catch up with Apple in the next three years?

The main differences between Microsoft and Apple

Microsoft derives most of its revenue from software and cloud-based services, while Apple earns most of its money from hardware sales. At Microsoft, the main metric to watch is its cloud revenue, which grew 32% to $91 billion, or 46% of its revenue, in fiscal year 2022 (which is completed in June). This segment is home to Office 365, Dynamics and Azure, the second largest cloud infrastructure platform in the world 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 follow its sales of iPhones, which generated 54% of its revenue in the first nine months of fiscal 2022 (which ended in June). They are also closely tracking its services revenue, which made up 19% of its revenue during this period and reached more than 860 million paid subscriptions at the end of the third quarter. The bulls believe that the growth of this ecosystem of services will lock users into Apple’s walled garden and gradually reduce its dependence on the iPhone.

Which company grew faster?

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

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

We should take these estimates with a grain of salt, as they likely don’t take into account Microsoft’s plans to aggressively grow its gaming business with more acquisitions or Apple’s AR and VR devices. However, they clearly suggest Microsoft’s cloud business will continue to thrive as Apple’s hardware sales cool off again.

Microsoft could easily catch up with Apple again

Based on these expectations, Microsoft shares are expected to trade at a premium to Apple shares. However, Microsoft trades at 25x forward earnings, while Apple has a slightly higher forward price-earnings ratio of 26x.

We could argue that the valuations of both stocks have been inflated by the flight to safer blue chip tech stocks during the current bear market, but investors also appear to be pricing many of Apple’s supposed products – including the AR gadgets and driverless cars – in its stock price. Therefore, Apple’s stock arguably deserves to trade at a lower multiple than Microsoft’s. If these valuations are reset over the next few years, Microsoft could easily become more valuable than Apple by 2025.

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