As the dust settles on a week of technology earnings in the US, there’s a dislocation I find hard to ignore. In the past 12 months, Apple’s share price is up 27% and Microsoft is flat. The outperformance began in mid-2024 when Apple pulled ahead and stayed ahead. Still, the share prices were strongly correlated, despite Apple maintaining the gap. Then, in a week when strong questions were asked about AI based on the emergence of DeepSeek, the market dumped Microsoft (down 2%) and dived into Apple (up 4.6%) — a notable shift into negative correlation. Is this justified, or could we see it reverse?
Diving into the Microsoft side of that equation is a separate analysis that needs to focus on Microsoft’s response to AI and the level of investment that has gone into data centres. The TL;DR is that the market is worried that Microsoft has sunk a fortune into technology that might be getting cheaper at a rapid rate. This suggests concerns about near-term earnings, as few would argue that Microsoft won’t find a way to carve out a strong long-term position. It might have a romantic relationship with OpenAI, but it certainly isn’t married to it.
This short-termism in the market is also why Apple found itself in the green. In the first quarter of financial 2025, earnings grew 10% year on year and the media release was full of talk about “all-time records for revenue” — the kind of language you expect to see from a company trying to prop up a share price that is trading at an eye-watering p:e of 37.5. Any company with growth prospects should be breaking revenue records all the time, so don’t put too much faith in those sorts of headlines.
Speaking of growth, Apple could only manage a revenue increase of 4%. Revenue from iPhone sales dipped 1% and Apple makes 55% of its revenue from iPhone sales, so that’s a worry. Bulls always point to growth in services revenue, up 14% in this case, noting that it comes at much higher margin than the products side of the business. This may be true, but is it enough?
Group gross margin was up 100 basis points to 46.9%, which means gross profit dollars increased 6.2%. Though we are now getting closer to an understanding of why Apple’s numbers looked decent in the end, comparing this with growth in operating expenses of 6.6% suggests that all is still not well. Apple is relying on improved gross margin mix to cover the increase in operating expenses. With a long-term lens, does that sound like a better investment story than Microsoft?
Microsoft is investing heavily in its future business model. Apple is relying on the past success of almost two decades of the iPhone
Growth investors are driving the market, especially in tech, so Apple’s use of share buybacks is still the not-so-secret weapon. This is precisely how it achieved earnings per share growth of 10% despite operating profit growing only 6%. Apple is a cash flow machine that has consistently used share buybacks to boost earnings. The number of shares used to calculate earnings decreased 2.8% in the past year as a direct result of buybacks. The pie may not be growing quickly, but there are fewer people trying to eat it each year.
Finance textbooks tell us that share buybacks are most effective when a stock is cheap. After all, the company is effectively investing in itself, so the market sees buybacks as a strong signal from management that the shares are undervalued. That’s the theory, at least. In practice, US companies tend to make buybacks part of their annual capital allocation policy regardless of where the share price is trading.
JPMorgan chair, CEO and doyen of the banking industry Jamie Dimon commented recently that special dividends don’t work. Instead, he prefers buybacks — and of course, as an investment banker, he understands that getting the timing right is helpful. But even without perfect timing, he understands that the market rewards buybacks far more than special dividends over time. This is for the simple reason that earnings per share growth becomes part of the justification for high earnings multiples. You create more value over time by driving the multiple higher rather than by paying large dividends. Growth investors want to see earnings growth, not a high dividend yield.
Right now, Microsoft is investing heavily in its future business model. Apple is relying on the past success of almost two decades of the iPhone. The market is paying a 37.5 multiple for Apple vs 33.4 for Microsoft. I can’t see this gap lasting.
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