Microsoft or Amazon: Which Company Will Reach $2 Trillion Valuation First?

NASDAQ: MSFT | Microsoft Corporation News, Ratings, and Charts

MSFT – The COVID-19 pandemic has accelerated the pace of digitization worldwide. While major tech stocks climbed to price levels beyond their expectations last year, tech-giant Apple (AAPL) blew the doors off and hit $2 trillion in market value. The two giants trailing just behind AAPL — Microsoft Corporation (MSFT) and Amazon.com (AMZN) — continue to dominate the tech space and are currently commanding $1.6 trillion-plus valuations. Let’s find out which of these might hit the $2 trillion mark next.

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The technology sector sparked an extraordinary rally during the pandemic and ruled the stock market in 2020. The health crisis drove unprecedented demand for connectivity, remote financial transactions, collaborations, e-commerce, and communication-related services. Consequently, the tech leader Apple Inc. (AAPL) easily topped the $2 trillion-mark in August 2020 to become the first American company to cross the impressive valuation level.

The robust demand for tech-based solutions has also benefited other trillion-dollar heavyweights like Microsoft Corporation (MSFT) and Amazon.com (AMZN), which  currently boast market capitalizations of approximately$1.65 trillion and $1.61 trillion, respectively.

Both stocks have generated significant returns over the past three years. While MSFT returned 157.8% over this period, AMZN gained 161.9%. In terms of past year performance, AMZN is a clear winner with 71.7% gains  versus MSFT’s 38.8%. But which of these stocks will reach a $2 trillion market valuation first? Let us find out.

Business Structure and Latest Movements  

MSFT develops, licenses, and supports software, services, devices, and solutions, worldwide. The company’s products include operating systems for computing devices, intelligent devices, servers, productivity and business solution applications, desktop and server management tools, and software development tools, that enable companies to transform digitally in the era of cloud computing. It operates through three segments – Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

MSFT recently announced a global collaboration with Johnson Controls International (JCI), a global leader for smart and sustainable buildings, to integrate OpenBlue Digital Twin and Azure Digital Twins. The collaboration  aims to encompass the entire ecosystem of building and device management technologies with digital cloud technologies.

In October, in collaboration with C3.ai and Adobe (ADBE), MSFT launched C3 AI CRM, the first enterprise-class, AI-first customer relationship management solution, purpose-built for industries that integrates Adobe Experience Cloud and drives customer-facing operations with predictive business insights.

AMZN engages in the retail sale of consumer products and service subscriptions through its online store, including merchandise and content that it purchases for resale from vendors and third-party sellers. The company operates through three segments – North America, International, and Amazon Web Services (AWS). The AWS segment provides a broad and fully integrated portfolio of cloud computing services to help us build, secure, and deploy big data applications.

AMZN continues to expand its transportation fleet. The company announced yesterday its first-ever purchase of Boeing (BA) 767-300 aircraft, expanding its fleet to continue to serve customers faster. AMZN purchased eleven aircraft from Delta Air Lines (DAL) and WestJet Airlines to join the Amazon Air cargo network in 2021 and 2022.

In  December, AWS signed a multi-year deal with Twitter (TWTR) to provide global cloud infrastructure to deliver Twitter timelines. AMZN has also agreed to provide its AWS services to Star Alliance, the world’s largest airline alliance; Nationwide, an insurance and financial services major; Thomson Reuters, a leading global provider of business information services, and the automobile giant, BMW Group, all in the month of December.

Recent Financial Results

In its fiscal first quarter that ended September 30, 2020, MSFT’s revenue surged 12% year-over-year to $37.2 billion on back of commercial cloud revenue generation of $15.2 billion, up 31% year-over-year. Server products and cloud services revenue increased 22%, driven by Azure revenue growth of 48%. Its EPS came in at $1.82, rising 32% compared to the year-ago quarter.

AMZN’s total net sales increased 37% year-over-year to $96.15 billion in the third quarter ended September 30, 2020. Online stores generated $48.35 billion in revenues, rising 37% year-over-year, while the AWS segment witnessed 29% growth, contributing $25.2 billion to the top-line. Moreover, EPS came in at $12.37, nearly tripling from the year-ago value of $4.23.

Past and Expected Financial Performance

MSFT’s revenue and EPS grew at a CAGR of 14% and 22.5%, respectively, over the past three  years. Also, the CAGR of the company’s free cash flow has been 34.4%.

Analysts expect the company’s revenue to increase 8.9% for the quarter ended December 31, and 10.7% in the current year. MSFT’s EPS is expected to grow 8.6% in the December quarter, and 17.4% in the current year. Moreover, its EPS is expected to grow at a rate of 14.6% per annum over the next five years.

In comparison,  AMZN’s revenue and EPS have grown at a CAGR of 29.3% and 105.8%, respectively, over the past three  years. The CAGR of the company’s free cash flow has been 59.6%.

Analysts expect AMZN’s revenue to increase 36.7% for the quarter ended December 31, and 18.3% in the current year. The company’s EPS is expected to grow 10.5% in the December quarter and 30.1% in the current year. Moreover, AMZN’s EPS is expected to grow at a rate of 36.4% per annum over the next five years.

AMZN has an edge over MSFT here.

Profitability      

AMZN’s trailing-12-month revenue is nearly 2.4 times MSFT’s However, MSFT is the more profitable with a net profit margin of 32.3% versus AMZN’s 5%.

Moreover, MSFT’s ROE and ROA of 41.4% and 12.1%, respectively, compare favorably with AMZN’s 25% and 5.2%,respectively.

Here MSFT is in an advantageous position.

Valuation

In terms of forward P/E, AMZN is currently trading at 92.59x, 72.4% more expensive than MSFT which is currently trading at 32.27x. Though MSFT is 143.5% more expensive than AMZN in terms of trailing-12-month P/S, the forward PEG of both the companies are similar(2.62x versus 2.68x).

In terms of trailing-12-month price/cash flow AMZN’s 29.21x is 17.4% higher than MSFT’s 24.89x.

MSFT looks much more affordable compared to AMZN.

POWR Ratings

While MSFT is rated “Strong Buy” in our proprietary POWR Ratings system, AMZN is rated “Buy.” Here are how the four components of overall POWR Rating are graded for MSFT and AMZN:

MSFT has an “A” for Trade Grade and Buy & Hold Grade, and a “B” for Peer Grade and Industry Rank. In the 104-stock Software – Application industry, it is ranked #1.

AMZN has an “A” for Trade Grade and Industry Rank, a “B” for Buy & Hold Grade and Peer Grade. It is ranked #15 in the 67-stock Internet industry.

The Winner

Even after a big year for tech, Wall Street analysts anticipate further upside for the tech stocks this year. Both MSFT and AMZN are good investments considering individuals’ and businesses’ increasing reliance on technology, their market dominance and superior pace of expansion, but MSFT appears well positioned to move faster to the $2 trillion valuation mark based on the factors discussed here.

MSFT is a relatively cheaper to bet on the growing dependence on cloud infrastructure and services. Additionally, the company’s well-diversified technology product and services portfolio, and its established position in international market puts the company in a strong position to continue notching up its market cap.

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MSFT shares were trading at $213.50 per share on Wednesday afternoon, down $4.40 (-2.02%). Year-to-date, MSFT has declined -4.01%, versus a 0.03% rise in the benchmark S&P 500 index during the same period.


About the Author: Sidharath Gupta


Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...


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