Will Microsoft be worth more than Apple by 2025?

Microsoft (MSFT 0.85%) and An apple (AAPL -0.64%) both have re-emerged as high-growth companies under visionary CEOs. After taking the helm of Microsoft in 2014, CEO Satya Nadella steered the tech giant on a new course by expanding its cloud-based services while reducing its reliance on desktop software. Microsoft has developed more mobile apps for iOS and Android, launched new Surface devices, expanded its Xbox gaming business and abandoned its struggling Windows Phone platform.

Apple stagnated for years before Steve Jobs returned as its CEO in 1997. Jobs’ tenure – which lasted until his death in 2011 – disrupted the markets for computers, digital media players, smartphones and tablets 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 ecosystem of sticky services with Apple Pay, Apple Music, Apple TV+, Apple Arcade and other new services.

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Microsoft and Apple generated huge profits for investors who believed in these transformations. Microsoft shares have risen about 570% since Nadella’s first day. Meanwhile, Apple shares skyrocketed 78,770% after Jobs returned as CEO.

The market capitalization of the two tech giants has crossed the $1 trillion mark in the past few years. Microsoft’s valuation has eclipsed Apple’s multiple times during that climb, but Apple’s current market cap of $2.5 trillion now puts it comfortably ahead of Microsoft’s $1.8 trillion valuation. Can Microsoft catch up with Apple again in the next three years?

The main differences between Microsoft and Apple

Microsoft generates most of its revenue from its software and cloud services, while Apple makes most of its money from selling hardware. At Microsoft, the main metric to watch is its cloud revenue, which grew 32% to $91 billion, or 46% of the top line, in fiscal 2022 (which ended in June). This segment houses Office 365, Dynamics and Azure – the world’s second largest cloud infrastructure platform after Amazon Web Services (AWS). It has recently been able 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 accounted for 19% of the top line during the 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 consumers into Apple’s walled garden and gradually reduce their dependence on the iPhone.

Which company is growing faster?

Microsoft’s business is more diversified than Apple’s. Its Surface and Xbox businesses are cyclical, but those two hardware divisions are much smaller than its core software and cloud-based services. Meanwhile, Apple’s growth still relies heavily on strict hardware upgrade cycles that gradually lengthen with each generation of faster devices. It is also more 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 2022 to 2025, while they expect Apple’s revenue to grow only at a CAGR of 5% from fiscal 2021 .to 2024. They also expect Microsoft’s revenue and earnings per share (EPS) to grow at a CAGR of 13% during that period. On the other hand, they expect Apple’s EPS to grow at a CAGR of 7%.

We should take these predictions with a grain of salt, as they likely don’t take into account Microsoft’s plans to aggressively expand its gaming business with more acquisitions or Apple’s long-rumored AR and VR devices. However, they make it clear that Microsoft’s cloud business will continue to thrive as Apple’s hardware sales cool again.

Microsoft can easily catch up with Apple again

Based on these expectations, Microsoft stock should trade at a premium to Apple stock. However, Microsoft trades at 25 times forward earnings, while Apple has a slightly more expensive forward price-to-earnings ratio of 26 times.

We could argue that the valuations of both stocks have been inflated by the flight to safer blue-chip tech stocks during the ongoing bear market, but investors also seem to be pricing in many of Apple’s rumored products, including AR gadgets and driverless cars – in the price of their shares. Therefore, Apple stock may deserve to trade at a lower value than Microsoft. If these valuations reset over the next few years, Microsoft could easily become more valuable than Apple by 2025.

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