Microsoft vs. Apple: The Battle for the Title of the World's Most Valuable Company

Introduction

In the world of large tech companies, few rival the positions held by Apple and Microsoft. While many are familiar with the legacies of Steve Jobs and Bill Gates, the current executives, Tim Cook and Satya Nadella, have quietly been building multi-trillion-dollar behemoths since 2011 and 2014, respectively. Although Microsoft has overtaken Apple a few times since 2011 when Apple first became the most valuable public company, Apple has primarily maintained that title. However, this position now appears to be much more competitive. On Friday, January 12th, 2024, amidst a flurry of bearish calls on Apple, Microsoft once again surpassed Apple in market capitalization. As of today, January 23rd, Apple has just reclaimed the title with a valuation of $2.998 trillion, while Microsoft lags slightly behind with a market cap of $2.936 trillion.

The Financial Statistics

Apple, known for its hardware products and easy-to-use software, currently boasts a PE (price to earnings) ratio of 31.68, according to Yahoo Finance. A PE ratio is an indicator of how much investors are willing to pay for $1 in earnings. Companies with more growth potential tend to warrant a higher price-to-earnings premium. However, Apple’s EPS (earnings per share) expectations for the year are only 7.6% , well below the S&P 500’s 12.2% , according to analysts covered by FactSet. This figure raises questions about Apple's ability to sustain its high valuation in the face of limited growth.

Microsoft has a PE ratio of 38.31, which at first glance makes it appear more expensive than Apple. However, Microsoft is expected to grow EPS at 12.4% per annum, which, in my point of view, gives it a higher PE than Apple.?

Microsoft’s AI Advantage

The AI revolution, spurred by the release of ChatGPT in November 2022, has really allowed Microsoft to thrive. Microsoft invested in OpenAI and now owns 49% of the company and 75% of the profits until the investment is recouped. OpenAI, which currently sells ChatGPT Plus and other enterprise products, is performing exceptionally well. According to The Information , OpenAI hit $1.6 billion in annual ARR (Annual Recurring Revenue). More mind-blowing is that OpenAI’s net ARR is expected to quadruple to over $5 billion by the end of the year. This is a market that Apple has not yet entered.

Moreover, Microsoft Azure, the second-largest cloud provider behind Amazon Web Services, is integrating OpenAI’s technology into its services. This integration is expected to revolutionize enterprise and commercial applications. An analysis by experts suggests that Microsoft could see an incremental $35 to $40 billion annually over the next few years from AI spend in the cloud sector. This represents a significant portion of its $110 billion cloud services revenue for fiscal 2023. With total revenue at $212 billion, this AI integration represents a substantial growth lever.

Microsoft also released Copilot, an AI-powered tool to increase employee productivity, at $30 per user. Many large companies and organizations have started to buy these subscriptions for employees. According to Microsoft , “70% of Copilot users said they were more productive, and 68% said it improved the quality of their work. Overall, users were 29% faster in a series of tasks (searching, writing, and summarizing).” That is truly incredible. Another catalyst is that Microsoft also just announced Copilot Pro, a $20 per month subscription to bring its AI features to small businesses and consumers.

Analysts at Piper Sandler project that Copilot could add $10 billion in revenue by 2026, a figure which Fortune believes may be conservative. If just 10% of Office users sign up for Copilot, then it could yield $14 billion more in annual revenue. This is a testament to Microsoft's innovative approach in weaving AI into its existing product suite, enhancing value and driving new revenue streams.

The Paths for Apple to Maintain Its Throne

While Apple has not announced any big AI products yet, they could, and likely do have products in store. One of which could be a highly anticipated chatbot, which has the potential to be highly personalized based on iPhone users' data. If this is a hit, it could significantly reduce the reliance on tools like ChatGPT. However, Apple would have to break its stance on user privacy and security, which has been very important to Apple’s identity since April 2021, when they gave users the option to prevent advertisers from seeing their data. The question is whether or not Apple will leverage its user data to create a groundbreaking chatbot and be willing to compromise its commitment to privacy?

Another catalyst for years ahead could be the Apple Vision Pro, which has the chance to be a significant disruptor. If the headset becomes affordable and user-friendly, it could become very successful and redefine tech like the iPhone did. Many call it Tim Cook’s last chance to create his own product, as the only big release during his time as CEO has been the Apple Watch. If major carriers like Verizon and AT&T subsidize the Vision Pro, it would further increase the chance it becomes a mainstream product. I must make the point that this is a long-term play, which by no means guarantees success.

If there is a huge iPhone upgrade cycle, Apple’s market cap could remain ahead of Microsoft’s. Because the new phones are so similar to the old models, many people have been delaying upgrading their phone beyond the 2-3 year standard. Eventually, though, those who have held off upgrading will have to, and that could trigger a significant surge in sales for Apple. Such a cycle would be a major catalyst for Apple's stock.

Another potential catalyst is an increase in advertising, app store, and service revenue. Apple has gradually been expanding its advertising footprint within its ecosystem. With its vast user base and the data generated from it, Apple has the potential to significantly increase its advertising revenue. This could be a game-changer, considering the high profitability of digital advertising. If Apple decides to expand its advertising capabilities more aggressively, possibly leveraging its App Store and other platforms, it could open up a substantial new revenue stream. However, like with the chatbot dilemma, this expansion must be balanced with Apple's commitment to user privacy. The App Store has been a consistent revenue generator for Apple, and there's room for significant growth. As more consumers shift towards digital services and app usage continues to rise, Apple could see a considerable increase in its services revenue. This is especially relevant considering Apple's efforts to diversify its revenue streams beyond hardware sales. A surge in services revenue, driven by the App Store and other service offerings like Apple Music and Apple TV+, could significantly boost Apple's stock price.

Lastly, there is the wildcard: the Apple Car. The Apple Car has been rumored for many years, but there is little information about it. If Apple were to release a car, it could redefine the automotive industry and propel Apple’s stock.

Antitrust and Legal Risks for Both Apple and Microsoft

A significant concern for Apple and Microsoft lies in the realm of antitrust law. A notable case involves the Justice Department's action against Google, which has substantial implications for Apple. This case focuses on a partnership wherein Google pays Apple 36% of its ad revenue from Safari, amounting to $19 billion annually, as estimated by Bernstein Analysts . This arrangement makes Google the default search engine on Safari. Analysts suggest that this partnership constitutes nearly a quarter of Apple's service revenue, with astonishingly high profit margins. If we apply a 30 times multiple to the operating profit for 2023, it implies that $570 billion of Apple’s market cap, or 19%, is linked to this deal. A ruling in favor of the DOJ could severely impact Apple’s finances and stock price. Furthermore, the New York Times reports that the Justice Department is nearing the end of an investigation that could lead to an antitrust case against Apple. Apple also faces several antitrust lawsuits in America and Europe regarding its closed App Store ecosystem, which many claim forces users into Apple's payment methods. While the outcomes of these cases are still undecided, they pose potential risks for Apple.

Regarding Microsoft, they are confronting their own set of legal challenges, particularly concerning OpenAI's ChatGPT. One case involves a lawsuit from the New York Times against Microsoft and OpenAI for copyright infringement. The lawsuit alleges that the core large language models of ChatGPT and Copilot utilized numerous New York Times articles to develop and train their AI models. The Times asserts that despite attempts at negotiation for fair compensation, no agreement has been reached with Microsoft and OpenAI. The newspaper seeks billions in damages, the removal of its content from the companies' databases, and a halt to further training of their models using its content. While a victory for the New York Times is not certain, the lawsuit presents a risk for Microsoft, as it may encourage other organizations to file similar lawsuits. The optimal outcome would be for Microsoft and OpenAI to find a way to compensate the sources of their data.

Conclusion

In conclusion, I am bullish on both Microsoft and Apple for the future. Please note that the views I have expressed are my own and should not be taken as financial advice. As a high school senior, I am writing to share my thoughts, research, and ideas with you. I look forward to continuing to write about tech, investing, and business in the future.