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Microsoft & Apple Valuation Race Gains Steam: Key Takeaways

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Microsoft’s (MSFT - Free Report) market capitalization came in close proximity to Apple’s (AAPL - Free Report) in yesterday’s trading session, eventually closing at a gap of approximately $4 billion. Reportedly, the Redmond-based tech giant came this close to the iPhone maker’s valuation almost eight years back in 2010.

Notably, during the trading session yesterday, Microsoft even secured the title of being the “most valued company” beating Apple to it

Shares of Microsoft were up nearly 1%, closing at $107.14 on Nov 27 while that of Apple were flat, closing at $174.24. Shares of Microsoft and Apple have returned 25.3% and 3%, respectively. S&P 500 index has remained flat in the same time.

In this regard we may note that Apple aced the trillionaire race around Aug 2. However, the recent uncertain global environment, U.S.-China trade war and the associated tariffs have taken a toll on tech players. Apple shares have witnessed a correction of 15.4% since Aug 3.

Notably, Morgan Stanley on Mar 26 had predicted that Microsoft’s impressive cloud adoption will lead it to a market capitalization of $1 trillion within the next 12 months. Having said that, let us now analyze the recent events that hold key for investors being kind to Microsoft of late.

Able Leadership of Satya Nadella

Satya Nadella’s tenure (over four years and counting) as the CEO of Microsoft since February 2014, succeeding Steve Ballmer, has been crucial in shaping the company’s business operations.

Nadella can be credited for turning the company around from a provider of legacy solutions to a leading provider of enterprise solutions whether on premise, or in the cloud or in facilitating a transition to the cloud through strategic partnerships, collaborations and acquisitions.

Overall Microsoft is dynamically exploring growth verticals under Nadella’s supervision. Case in point, Microsoft shares were trading at $36.35 on Feb 4, 2014 when Nadella took over.

Diversified Product Portfolio, End-Markets Offer Insulation

Microsoft is witnessing overall growth across the operating segments under Nadella’s leadership. Be it E3, Surface Event or Ignite, the company is firing on all cylinders to gain market share across its diversified customer base. The new product launches, robust updates and other progressive initiatives are cushioning the stock on the back of buoyant investors’ optimism.

Strength in Azure: A Master Key

Momentum in Microsoft’s cloud computing service — Azure — is the primary driver. Azure revenues soared 76% at constant currency on a year-over-year basis in the last reported quarter.

The company added almost 100 new capabilities to Azure in the first quarter of fiscal 2019, with focus on existing workloads like security and new workloads such as Internet of Things (IoT) and Edge AI.

A strong customer commitment to Azure is expected to drive cloud revenues further. In fact, Azure’s clientele continues to expand with Walmart (WMT - Free Report) , GAP, Volkswagen, Anheuser-Busch In Bev and Mastercard selecting the cloud platform.

Notably, Azure has become a preferred partner for government departments in recent times. The cloud platform has been selected by the likes of Alaska Department of Transportation, Duo+ based out of the Netherlands, and South African government’s Department of Science and Technology, to name a few.

Microsoft recently ramped up Azure Government Portfolio, increasing support to various cloud services for government. Notably, the developments are likely to aid Azure in securing Pentagon’s Joint Enterprise Defense Infrastructure (“JEDI”) cloud contract. The 10-year contract is estimated to be worth $10 billion.

Burgeoning Office 365, LinkedIn, Gaming, Surface Businesses

The company is benefiting from growing user base of its different applications like Office 365 commercial, Dynamics 365, Outlook mobile and Teams. Per July 2018 data, Windows 10 is active on nearly 700 million devices, with continued deployments across enterprises.

Expanding portfolio is the major growth driver. The company is incorporating artificial intelligence (AI) capabilities in its Office 365 solutions, which are expected to boost adoption rate. LinkedIn is also growing faster than previously anticipated.

Microsoft’s gaming segment is performing well on the back of a combination of Xbox Live, Game Pass subscriptions and Mixer. This in turn is driving user engagement.

The company’s Surface business also deserves a special mention. Surface revenues are anticipated to grow faster benefiting from recently launched devices, including Surface Pro 6 and Surface Laptop 2.

Further, strategic acquisitions like GitHub, FSLogix, XOXCO, among others, are expected to expand Microsoft’s total addressable market (“TAM”) and penetration, going ahead.

Microsoft Corporation Price and Consensus

 

Microsoft Corporation Price and Consensus | Microsoft Corporation Quote

Apple Keeping Investors Anxious

President Trump has announced intentions of imposing tariff on all remaining imports from China. This batch of imports will surely include laptops and Apple’s flagship iPhone that has so far been successful in avoiding tariffs.

Per Reuters, which quoted Trump’s interview with The Wall Street Journal, the President is most likely to increase tariff rates from 10% imposed in September on $200 billion worth of Chinese imports to 25% from Jan 1, 2019. Apple’s strategy to assemble iPhone in China helps it offer the device at a competitive price, which however, will be hurt by imposition of tariffs.

Further, Apple is already plagued by concerns over lower demand for its new iPhones, which has reportedly compelled the company to cut production targets. In fact, the sluggish demand for iPhone negatively impacted Apple suppliers like Lumentum Holdings and Qorvo (QRVO - Free Report) to mention a couple.

The imposition of tariff will make iPhone more expensive, consequently dragging down the demand. This is also expected to hurt Apple’s market share, going ahead.

To Conclude

We believe the odds in favor of an upside for Microsoft stock are high in the near term. The company is leaving no stone unturned to capitalize on the growth prospects in the end-markets it caters to.

Microsoft carries a Zacks Rank #2 (Buy), while Apple has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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