Why Microsoft stock is a better investment than Apple

Apple has long been the most valuable American company, but Microsoft appears to be on its way to overtaking it. A review of both companies’ financial performance and future revenue and profit expectations shows that Apple is no longer a growth stock and Microsoft is a better long-term investment.

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As of Friday’s close, Apple AAPL held the top spot with a market capitalization of $2.892 trillion, just ahead of Microsoft MSFT’s $2.887 trillion. Apple’s 2024 stack is down 3.4%, while Microsoft’s is up 3.3% in the new year.

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PER rating

Below is a quick comparison of the stock’s total return (including dividend reinvestment) for the SPDR S&P 500 ETF Trust SPY to show how the company’s forward price-earnings ratio valuation has fared through Thursday’s close .

Apple’s forward P/E ratio (price divided by 12-month rolling earnings per share forecasts of analysts surveyed by FactSet) has more than doubled over the past five years. As evidenced by SPY’s 30% increase in valuation, the overall stock market is more expensive than before. Microsoft’s valuation rose 46% on this basis, not only because its stock hasn’t performed as well as Apple’s, but because Microsoft has been growing earnings per share much faster.

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Looking back and looking ahead

Here we take a look at the company’s sales, earnings per share, and compound annual growth rate (CAGR) of the S&P 500 SPX over the past five years. These are calendar year numbers and have been adjusted by FactSet, as some companies’ fiscal years, such as Apple, do not match the calendar. The 2023 numbers are based on his first three quarters of performance and fourth quarter projections. The table also includes the projected CAGR of sales and earnings per share from 2023 to 2025.

Over the past five years, Apple’s revenue and earnings per share have grown faster than the S&P 500, while Microsoft has grown faster.

Looking forward, Apple’s revenue growth is expected to follow the index’s growth pace and lag significantly behind Microsoft’s. Apple’s revenue is also expected to grow at a slower pace, again far behind Microsoft and the index.

The rapid pace of growth justifies the premium stock price, and it’s no surprise that Microsoft currently trades at a higher forward P/E than Apple. But it’s hard to justify Apple’s premium over the overall S&P 500 based on these numbers.

Analysts working at securities companies seem to agree with this. A summary of Apple and Microsoft’s valuations and price targets is as follows.

Given the strength of both stocks in 2023, expectations for their share price gains over the next year are modest. But analysts favor Microsoft by a wide margin.

Click on the ticker to see details about each company.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on MarketWatch’s quotes page.

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