Microsoft Expected to Overtake Apple in Market Value in the Next Five Years

Microsoft’s early advancements in artificial intelligence (AI) have positioned the tech giant to potentially surpass Apple in market value over the next five years, according to a consensus of 13 institutional investors. 

Microsoft’s shares have surged by 7% in 2024, pushing its market capitalization above $3 trillion and dethroning Apple as the world’s most valuable company. The unanimous agreement among the investors indicates a strong belief that Microsoft’s current trajectory will continue to outpace Apple’s.

Microsoft’s recent successes in generative AI

While share prices and valuations may fluctuate in the short term, the investors consulted by Reuters emphasized Microsoft’s recent accomplishments in generative AI as a pivotal factor in its favor. 

Microsoft’s investments in technologies like ChatGPT, developed by OpenAI, and the integration of generative AI across its business operations have positioned the company as a leader in this rapidly evolving field. Generative AI is expected to bolster Microsoft’s cloud computing offerings, strengthening its competition with Amazon and Alphabet in the burgeoning cloud market.

King Lip, chief strategist at Baker Avenue Wealth Management, pointed out that Microsoft has a diverse range of assets, including Azure cloud, gaming, enterprise software, and AI, making it well-positioned for future growth. In contrast, Apple’s reliance on the mature iPhone market has raised questions about its ability to compete effectively in the AI arena.

Apple’s efforts in AI

While Apple has been quietly incorporating AI into its product functions, such as improving iPhone photography, investors are eager to hear more about its AI plans when it reports its December quarter results. Apple faces challenges in China, where demand for iPhones has been impacted by a slow economic recovery from the COVID-19 pandemic and competition from Huawei.

Apple’s recent Vision Pro mixed-reality headset launch represents a significant investment, marking its most substantial bet in over a decade. However, its stock performance in 2024 has been flat, underperforming both the S&P 500 and Microsoft’s shares, which have experienced a 7% surge this year.

Microsoft’s impressive stock rally and valuation

Microsoft’s shares enjoyed a remarkable 57% rally in 2023, driven by its leadership in generative AI. As a result, the company’s stock is currently trading at 33 times expected earnings, compared to a forward price-to-earnings (PE) ratio of 28 for Apple and approximately 20 for the S&P 500, according to data from LSEG. This valuation reflects the high expectations for Microsoft’s continued growth.

Mike Dickson, head of research at Horizon Investments, stressed that while both Microsoft and Apple are quality growth companies, Microsoft is better positioned to justify its valuation due to its capacity for aggressive growth and increased productivity.

Analysts’ recommendations

Fifty Wall Street analysts recommend buying Microsoft shares, with none advising selling and only four maintaining neutral ratings, according to LSEG data. In contrast, Apple has 26 positive analyst ratings, 12 neutral ratings, and two analysts recommending selling, including a recent downgrade to “underweight” by Barclays due to concerns about lackluster iPhone sales.