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Why Microsoft’s stock is a better investment than Apple

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Apple Inc. has long been the most valuable U.S. company, but Microsoft Corp. seems poised to overtake it. A look back at the companies’ financial performance and a look ahead at expected revenue and profits make the case that Apple is no longer a growth stock and that Microsoft is the better long-term investment.

At the close on Friday, Apple
AAPL,
+0.18%

remained in the top spot with a market capitalization of $2.892 trillion, just ahead of Microsoft
MSFT,
+1.00%

at $2.887 trillion. Apple’s stack was down 3.4% for 2024, while Microsoft was up 3.3% for the new year.

 

P/E valuation

Here’s a quick comparison of total returns (with dividends reinvested) for the stocks, and for the SPDR S&P 500 ETF Trust
SPY,
to show how the companies’ forward price-to-earnings valuations have moved, through the close on Thursday:

Company or ETF Ticker Five-year total return Forward P/E Forward P/E five years ago Change in P/E valuation
Apple Inc. AAPL,
+0.18%
408% 27.7 12.3 125%
Microsoft Corp. MSFT,
+1.00%
294% 31.7 21.6 46%
SPDR S&P 500 ETF Trust SPY 100% 19.5 15.1 30%
Source: FactSet

Apple’s forward P/E (price divided by rolling 12-month earnings-per-share estimates among analysts polled by FactSet) has more than doubled over the past five years. The entire stock market is more expensive than it was, as you can see with SPY’s valuation climbing 30%. Microsoft’s valuation on this basis has grown 46%, not only because its stock hasn’t performed as well as Apple’s stock has, but because Microsoft has grown its earnings per share much more quickly.

Looking back and looking ahead

Here’s a look at compound annual growth rates (CAGR) for the companies’ sales and earnings per share over the past five years and the S&P 500
SPX.
These are calendar-year numbers, adjusted by FactSet because some companies, including Apple, have fiscal years that don’t match the calendar. The numbers for 2023 are based on the first three quarters’ results and estimates for the fourth quarter. The table also includes projected CAGR for sales and earnings per share from 2023 through 2025.

Company or index Estimated five-year sales CAGR through 2023 Estimated five-year EPS CAGR though 2023 Expected two-year sales CAGR through 2025 Expected two-year EPS CAGR through 2025
Apple Inc. 8.1% 15.4% 4.9% 8.2%
Microsoft Corp. 14.0% 19.4% 14.3% 16.2%
S&P 500 7.0% 7.2% 5.3% 12.3%
Source: FactSet

Over the past five years, Apple’s sales and earnings per share have grown at a faster pace than those of the S&P 500, but Microsoft has grown more quickly.

Looking ahead, the estimates point to a pace of sales growth for Apple that will trail that of the index and lag far behind Microsoft. Apple is also expected to increase earnings at a slowing pace, again way behind Microsoft and even the index.

A rapid pace of growth justifies a premium share price, so it makes sense that Microsoft now trades at a higher forward P/E than Apple does. But Apple’s premium to the full S&P 500 is difficult to justify, based on these numbers.

Analysts working for brokerage firms seem to agree. Here is a summary of ratings and price targets for Apple and Microsoft:

Company Ticker Share “buy” ratings Share neutral ratings Share “sell” ratings Jan. 11 price Consensus price target Implied 12-month upside potential
Apple Inc. AAPL,
+0.18%
57% 34% 9% $185.59 $197.58 6%
Microsoft Corp. MSFT,
+1.00%
90% 10% 0% $384.63 $420.91 9%
Source: FactSet

Following a stellar 2023 for both stocks, expectations for share price increases over the next year are modest. But the analysts favor Microsoft by a large margin.

 

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Investment

Tesla shares soar more than 14% as Trump win is seen boosting Elon Musk’s electric vehicle company

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NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.

Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.

“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”

Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.

Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.

Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.

Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.

In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.

The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.

And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.

Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.

The stock is now showing a 16.1% gain for the year after rising the past two days.

The Canadian Press. All rights reserved.

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S&P/TSX composite up more than 100 points, U.S. stock markets mixed

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TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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S&P/TSX up more than 200 points, U.S. markets also higher

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TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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