Apple vs. Microsoft: Evaluating AI Stocks in the Current Market

Key Insights

• Apple’s growth appears to have plateaued, with AI-enhanced products failing to significantly boost sales.

• Microsoft’s AI strategy seems uncertain as it distances itself from OpenAI and focuses on internal development.

Apple and Microsoft, the second and third-largest companies by market capitalization respectively, have long been competitors in the tech industry. However, both giants have faced challenges in the artificial intelligence (AI) arena, allowing other players to gain ground. Apple’s latest iPhone iterations haven’t sparked the anticipated AI-driven upgrade cycle, while Microsoft’s most notable AI achievements have stemmed from a complex partnership with OpenAI.

Despite these hurdles, both companies maintain significant influence in the AI sector. The question for investors is which company is better positioned to leverage AI for future returns.

Apple’s Current Position

Apple’s business has entered a phase of maturation. Sales of its devices, particularly the iPhone, which accounts for over half of its revenue, have leveled off. While Apple Services continues to grow rapidly, it serves more as an extension of the existing ecosystem rather than a source of groundbreaking innovations.

This slowdown persists despite Apple’s widespread integration of AI across its product line. Features such as enhanced Siri functionality, AI-powered photo and image search, and Genmoji, a tool for creating personalized emojis, have been introduced. However, these AI enhancements haven’t significantly accelerated the upgrade cycle or driven substantial growth.

The upcoming iPhone model is expected to offer improvements like a sleeker design, increased RAM, and extended battery life. Yet, neither these upgrades nor the AI functionalities have spurred a significant increase in sales.

For the trailing 12 months ending June 28, Apple reported net sales of $409 billion, a 6% year-over-year increase. With costs and expenses largely keeping pace with revenue, the $99 billion profit for this period was lower than the $102 billion earned in the previous year.

Apple’s stock has seen a modest 9% rise over the past year. Its price-to-earnings (P/E) ratio of 36 exceeds the S&P 500 average of 30, which may seem high given the single-digit growth rate, potentially dampening investor enthusiasm for its AI prospects.

Microsoft’s Market Performance

Microsoft, being more software-oriented than Apple, may have a higher dependence on AI for its success. Its prominent offering, the cloud service Azure, plays a crucial role in running AI models.

The company has deeply integrated AI into its legacy products, including Windows OS and Microsoft Office. Its partnership with OpenAI has further enhanced these capabilities.

However, the limitations of this partnership may have constrained Microsoft’s AI leadership. Expectations that its Bing search engine would effectively challenge Alphabet’s Google Search haven’t materialized.

In response, Microsoft has begun referring to OpenAI as a “competitor” and is ramping up internal AI development. The company has also started recruiting AI talent from competitors such as Alphabet.

The impact of these moves on Microsoft’s position as an AI player remains to be seen. Nevertheless, investors can find reassurance in the company’s financial performance.

For fiscal 2025 (ended June 30), Microsoft reported revenue of $282 billion, marking a 15% annual increase. Despite faster growth in operating expenses compared to revenue, other factors including income taxes largely offset this increase. As a result, net income for the period reached $102 billion, a 16% rise.

Microsoft’s stock has climbed 22% over the past year. Its P/E ratio of 36 closely aligns with Apple’s, suggesting that the choice between these AI stocks may not be primarily influenced by their AI offerings.

Comparing Apple and Microsoft

In the current market environment, Microsoft appears to be the more attractive option between the two stocks.

While both companies have yet to fully capitalize on their AI offerings in the eyes of the market, and both trade at similar valuations, Microsoft has demonstrated superior growth in both revenue and profits, leading to higher market returns. This improved performance likely gives Microsoft an edge in this comparison.