ETFs
Tech ETF Faceoff: Apple vs. Microsoft
So far, the technology sector has been the undisputed leader of the market recovery in 2024, driven by the craze for artificial intelligence, hopes of rate cuts and the growing share of the “Magnificent Seven”.
The Magnificent Seven are the biggest growth engine in the technology sector. Especially, Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) are fighting for the spot of most valuable company. Last week, Apple reclaimed the most valuable company title, edging out Microsoft, but is unable to maintain its momentum. The iPhone maker currently has a market capitalization of $3.26 trillion, while the software maker has $3.29 trillion.
Apple
Apple, which was far behind its competitors in AI adoption, is finally catching up after launching the latest AI features at its much-anticipated Worldwide Developers Conference. The introduction of many AI-based features is expected to kick off the next upgrade cycle, improving the company’s performance and restoring investor confidence in Apple.
The iPhone maker has revealed a brand new AI feature called Apple Intelligence for iPhone, iPad and Mac. The technology will make it possible to summarize text, create original images and retrieve the most relevant data when users need it. Apple announced a partnership with ChatGPT creator OpenAI, which allows customers to access ChatGPT through Siri at no additional cost.
Apple reported strong results for the second quarter of fiscal 2024, beating both profit and revenue estimates. The tech giant unveiled the largest buyback in company history and increased its dividend payout.
Microsoft
The world’s largest software maker also reported strong results for the third quarter of fiscal 2024, beating profit and revenue estimates, driven by strong demand for cloud and artificial intelligence offerings.
Microsoft has invested billions of dollars in AI in a bid to drive growth, particularly in its cloud computing services, and is now reaping the rewards. About 7% of Azure’s revenue growth comes from AI. Microsoft CEO Satya Nadella said during last quarter’s earnings conference call that 65% of Fortune 500 companies use the Azure service that provides OpenAI technology to businesses. Demand for generative AI will continue to fuel Microsoft’s cloud business.
Microsoft is now focusing on AI transformation through its new offerings like Microsoft Copilot. “Microsoft Copilot and Copilot Stack are orchestrating a new era of AI transformation, driving better business outcomes across all roles and industries,” added Nadella.
Image Source: Zacks Investment Research
Apple Vs. Microsoft
Microsoft leads the way this year, with a 17.7% increase compared to a 10.4% increase for Apple. Both stocks currently have a Zacks Rank #3 (Hold) and Momentum Score of A, along with a solid Zacks Industry Rank in the top 23%.
Although Microsoft has a growth score of B, meaning it is poised for strong growth, Apple looks relatively cheaper at current levels as it trades at a P/E ratio of 32.30 versus 37.60 for Microsoft. Apple’s earnings are expected to grow 7.3% for the fiscal year (ending September 2024), below the industry average of 30.68%. However, its revenue is expected to grow 0.4%, well ahead of the industry’s 0.03% growth.
Image Source: Zacks Investment Research
Apple currently has an average brokerage recommendation of 1.75, up from 1.82 a month ago, made by 30 brokerage firms. Of those that derive from the current ABR, 18 are strong buys and three are buys. Strong Buy and Buy represent 60% and 10% of all recommendations, respectively. A month ago, Strong Buy accounted for 56.67%, while Buy accounted for 10%.
Meanwhile, Microsoft has an ABR of 1.13 achieved by 39 brokerage firms. Of those that derive from the current ABR, 35 are strong buys and three are buys. Strong Buy and Buy represent 89.74% and 7.69% of all recommendations, respectively. A month ago, Strong Buy accounted for 89.47%, while Buy accounted for 7.89%. The company’s earnings and revenue are expected to grow 19.98% and 15.33%, respectively, for the current fiscal year (ending June 2024), much higher than the industry average growth of 11.50% and 6.67%.
ETFs to bet on
Based on the discussion above, Apple and Microsoft are in an uphill battle and investors should include both stocks in their portfolios to harness growth. Good news is expected for Apple, given its cheap valuation, strong ABR, and new AI innovations. Again, Microsoft is poised for above-average growth, given its strong earnings and growth estimates.
So, investors looking to invest in both companies at the same time might consider Select Sector SPDR Technology ETF (NYSE:XLK), MSCI Information Technology ETF (NYSE: FTEC), Vanguard Information Technology ETF (NYSE: VGT) and iShares Dow Jones US Technology ETF (NYSE:IYW). XLK holds the largest share of 44.1% in AAPL and MSFT, followed by 33.7% for IYW, 32.8% for FTEC and 32.6% for VGT. All four ETFs sport a Zacks ETF Rank #1 (Strong Buy) and have been making new highs lately.
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