Investors see Microsoft's stock market value leaving Apple behind

Microsoft's early lead in artificial intelligence has the software heavyweight's stock market value poised to pull decisively ahead of Apple's over the next five years, 13 institutional investors unanimously agreed ahead of the tech titans' quarterly results this week.

Microsoft's (MSFT.O), opens new tab shares have surged 7% so far in 2024, recently sending its stock market value above $3 trillion and dethroning Apple (AAPL.O), opens new tab as the world's most valuable company. As of Friday, the Redmond, Washington software maker's market capitalization was a few billion dollars above Apple's.

Asked which would be more valuable five years from now, all 13 investments strategists and portfolio managers consulted by Reuters last week said they expect Microsoft to outpace Apple.

Share prices and valuations could shift this week as Microsoft reports its quarterly results on Tuesday, followed by Apple on Thursday. In the long term, though, all the investors consulted by Reuters said Microsoft's recent successes in generative AI give it a powerful advantage over Apple.

Still, the race between Apple and Microsoft could turn into a race for second place, some said, citing the huge recent gains by Nvidia (NVDA.O), opens new tab, whose chips have powered the AI revolution. Microsoft made early investments in ChatGPT-maker OpenAI and is incorporating generative AI technology across its business. AI is likely to benefit Microsoft's cloud-computing offerings as it competes with Amazon (AMZN.O), opens new tab and Alphabet (GOOGL.O), opens new tab in that burgeoning market. In its applications business, Outlook now offers users AI help composing emails.

Microsoft "has more levers to pull in the forms of Azure cloud, gaming, enterprise software, and of course, AI is the most compelling," said King Lip, chief strategist at Baker Avenue Wealth Management. "Apple is most reliant on the iPhone, which is a mature market, and the company has yet to detail how it will compete in the AI arms race."

Apple has been quietly incorporating AI into product functions, such as snapping better iPhone photos, but investors will want to hear more AI plans when the company reports its December quarter results. They also will be watching China, where demand for iPhones has slumped due to a slow economic recovery from the COVID-19 pandemic and as a resurgent Huawei erodes the Cupertino, California company's market share.

Apple starts sales of its Vision Pro mixed-reality headset in the U.S. on Friday, its most expensive bet in more than a decade.

Since Steve Jobs launched the iPhone in 2007, Apple's stock has surged more than 4,300%, helping Apple eclipse Exxon Mobil (XOM.N), opens new tab in 2011 as Wall Street's most valuable company and making it a cornerstone investment of portfolio managers trying to outperform the S&P 500 (.SPX), opens new tab.

With investors worried about soft demand for iPhones in China, Apple's stock is flat so far in 2024, underperforming the S&P 500's nearly 2.5% rise as well as the 7% surge in Microsoft shares this year.

Microsoft's shares also rallied 57% rally in 2023 thanks to its lead in generative AI. Its stock is now trading at 33 times expected earnings, compared a forward PE of 28 for Apple and around 20 for the S&P 500, according to LSEG.

"These are quality growth companies ... but in order to warrant these valuations, they need to continue to grow at aggressive clips. You're going to need increases in productivity, and I think Microsoft is better poised than Apple to do so," said Mike Dickson, head of research at Horizon Investments.

Fifty Wall Street analysts recommend buying Microsoft shares, while four analysts have neutral ratings and none recommend selling, according to LSEG data.

Apple has 26 positive analyst ratings and 12 neutral ratings, while two analysts recommend selling, including a downgrade to "underweight" by Barclays this month due to worries about "lackluster" iPhone sales.

Nvidia, now the most valuable chipmaker after its shares more than tripled last year, may also be a contender for the world's most valuable company in the next few years, said Wayne Kaufman, Chief Market analyst at Phoenix Financial Services in New York.

After hitting record highs last week, Nvidia's market capitalization reached over $1.5 trillion making it Wall Street's fifth most valuable company, less than $200 billion behind Amazon (AMZN.O), opens new tab.

"I have told our brokers and clients that Nvidia is like Microsoft in the early 90s and Intel in the early 80s," Kaufman said.