Call it a battle of the tech giants, maybe picture Ultraman versus Johnny Sokko’s giant robot. In reality, it’s Microsoft Corporation (MSFT – Research Report) and Apple, Inc. (AAPL – Research Report) switching places in the stock markets.
It’s a dramatic switch. As recently as August, Apple was the world’s most valuable publicly traded company and had a market cap over $1 trillion After two months of stock losses, Apple now stands in second place at $804 billion, while Microsoft now holds the #1 slot with a total market cap of $833 billion. Let’s take a closer look at both companies, and at what TipRanks top-rated analysts have to say about the outlook for these two market-leading stocks.
First, the Bad News
Both stocks hit their all-time peak this past October – Microsoft on Oct 1 and Apple on Oct 3 – and both have slipped since. The decline has been swifter and longer for Apple. AAPL stock is down 27% from its high point, and the company’s announcement of lowered expectations for iPhone sales has been a major factor in pushing the share price down. Apple’s current share price is $169.
MSFT in the meantime, is only down 5%. Where Apple has faced a steady fall in the markets, the software giant has mainly faced an increase in volatility. Since October 1, MSFT shares have fallen as low as $101, and recovered to as much as $112. MSFT currently trades at $109.
Market Forces Explain the Difference
As mentioned, Apple has recently lowered projections on iPhone sales. Worse than that, however, from an investor or customer perspective, the company also announced in November that starting in the next fiscal quarter it will stop publishing iPhone, iPad, and MacBook sales data altogether. The move pushed the share price down 7% and sparked fears that sales numbers are failing to reach even the lowered bar and that comparative pricing will be less transparent, making it more difficult for investors to evaluate the company objectively.
Apple defended the move as a way of focusing attention on its service segment, the Apple Store, iCloud, and Apple Music recurring sales that cater to the company’s existing customer base. Service business accounted for nearly $10 billion in Apple revenues last quarter and is growing where device sales are stagnating. The policy is part of a larger shift within Apple, as the company transitions to a more Service-dependent business model as the smart device market matures.
Microsoft, on the other hand, faces an easier task. Like Apple, the company is making a transition, but in Microsoft’s case the transition is from selling software to selling cloud access. Azure and Office 365 are Microsoft’s growth sectors, while the company’s Windows and MSOffice packages see their share of the total revenues slip. In essence, where Apple has to switch the way it drives revenues, Microsoft simply has to switch customers from standard software to cloud-based software. It’s an easier lift for Microsoft.
What the Analysts have to Say
Analyst reviews of Apple are decidedly mixed. In the last three months, there have been 13 ‘buys’ vs 11 ‘hold’ and 1 ‘sell’ rating. The consensus, based on that, is a ‘Moderate Buy,’ and the average price target is $223. Compared to the share price of $169, this gives an upside potential of 32%.
Andy Hargreaves (Track Record & Ratings) of Key Banc sets out the bearish case for AAPL. He gives the stock a ‘Hold’ rating and points out product pricing issues as problem for the company going forward. In his comments, he says, “Pricing power problem does not have a readily apparent solution. With the pricing power of screen size and brand seemingly maximized, we see little to drive incremental pricing power.” He believes that price issues may be a greater challenge heading into 2020, as customers continue to be willing to trade devices down in the mid-range.
For the bullish case, Tigress Financial’s Ivan Feinseth (Track Record & Ratings) notes the sheer size of Apple customer base as an obvious route for the company’s services expansion. Feinseth also suggests that AAPL’s lower price lower price is chance to buy at a discount: “We view the recent pullback as a major buying opportunity as the ability to monetize its base of over 750 million iPhone users and expand service revenues will continue to drive further upside in the stock.”
Net-net the stock’s cautiously optimistic Moderate Buy consensus suggests a stock with greater risk attached, despite the company’s clear strengths.
Microsoft, on the other hand, gets a much more bullish ‘Strong Buy’ outlook from the analysts. MSFT has had 17 reviews in the last three months: 1 ‘sell’ and 17 consecutive ‘buys.’ The trade off: lower upside potential of 14% vs AAPL’s 30% plus.
Writing from Wedbush, Daniel Ives (Track Record & Ratings) says, “Microsoft remains in an enviable position heading into 2019 on the heels of its cloud success and is firing on all cylinders around its Office 365 and Azure strategic vision.” Ives gives an aggressive $140 price target, suggesting a 28% upside to the stock. He cites the secular trend of the shift to cloud services as a major benefit for Microsoft, one that will provide a tailwind for the next year to year-and-a-half.
Meanwhile Brent Bracelin (Track Record & Ratings) from Key Banc also takes an upbeat view of MSFT. Setting a $125 target and looking toward the SaaS future, he says, “The Windows operating system has been an integral aspect of the PC and server landscape for 30+ years and will likely continue to be so. However, the cloud-first era has opened up a much larger opportunity for Microsoft.”
Bracelin is rated #19 overall in TipRanks’ database. His price target gives a 15% upside potential on MSFT. He bases his optimistic outlook on his estimate that Azure revenue will surpass Windows within three years, and that LinkedIn and Office 365 revenues could more than double in the same time frame.
Enjoy Research Reports on the Stocks in this Article:
Apple, Inc. (AAPL) Research Report
Microsoft Corporation (MSFT) Research Report
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