Apple Inc., once hailed as the most valuable company in the U.S., is facing fierce competition from Microsoft Corp. Analyzing their financial performance and future projections reveals a significant shift in the market. While Apple’s growth has plateaued, Microsoft emerges as a compelling long-term investment.
Current Standing
As of late Friday morning, Apple holds the top position with a staggering market capitalization of $2.893 trillion. However, Microsoft is hot on its heels at $2.884 trillion. This narrow margin suggests that Microsoft’s ascent is imminent. Apple’s stock has experienced a year-to-date decline of 3.4% in 2024, while Microsoft boasts a 3.1% gain during the same period.
Evaluating P/E Valuation
To gain further insight, let’s compare the total returns (including dividends reinvested) of both companies in comparison to the SPDR S&P 500 ETF Trust (SPY). This analysis sheds light on how forward price-to-earnings (P/E) valuations have evolved up until Thursday’s close.
Over the past five years, Apple’s forward P/E ratio, calculated by dividing stock price by rolling 12-month earnings-per-share estimates provided by FactSet analysts, has more than doubled. Interestingly, the entire stock market has experienced increased valuation, as evidenced by a 30% climb in SPY’s valuation. On the other hand, Microsoft’s valuation has grown by 46%. This growth can be attributed not only to Apple’s superior stock performance but also to Microsoft’s impressive earnings-per-share growth.
By reevaluating the landscape, it becomes apparent that Apple’s status as a growth stock is waning, opening the door for Microsoft to emerge as a more promising long-term investment option.
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Looking back and looking ahead
Past Performance
Over the past five years, both Apple and Microsoft have experienced growth in sales and earnings per share. However, Microsoft has shown a faster growth rate compared to Apple.
Future Outlook
Looking ahead, the estimates suggest that Apple’s sales growth will be slower than that of the index, and significantly behind Microsoft. Furthermore, Apple’s earnings are expected to increase at a slower pace, trailing both Microsoft and the index.
Premium Share Price
Given the rapid pace of growth, it is understandable that Microsoft currently trades at a higher forward price-to-earnings ratio (P/E) than Apple. However, Apple’s premium compared to the full S&P 500 is difficult to justify based on these numbers.
Analyst Ratings and Price Targets
Analysts working for brokerage firms seem to agree with this assessment. They have given a summary of ratings and price targets for both Apple and Microsoft, indicating a large preference for Microsoft.
For more information on each company, click on their respective tickers.
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