The market rout in the past four weeks has spared no one. Mega cap technology giants, which fueled the stock market boom during the past decade, also took a nosedive as investors sold stocks indiscriminately after the coronavirus pandemic spread to the U.S.
Though there's still a massive adjustment taking place across the economy and in financial markets, current price action in the market suggests that investors are quickly snapping up shares of some of the best-run companies, taking advantage of the dramatic drop in prices to buy into some previously very costly stocks.
Below we take a look at Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) — two companies with market caps of more than a trillion dollars — to understand which stock is better positioned to outperform once the dust is settled and the COVID-19 pandemic is contained.
Apple’s Cash Cushion
Shares of iPhone maker, Apple, one of the 30 component stocks on the Dow Jones Industrial Average were among the hardest hit. They had plunged 35% by March 23 from their peak of $327.85 on Jan. 29.
But as markets began to recover from their worst downturn since the 2008 financial crisis, Apple also staged a smart rebound, gaining about 20% from the lowest point this month. Shares closed yesterday at $254.81, after gaining 2.8%.
The coronavirus, which has already killed 3,170 people and infected more than 160,000 people in the U.S, has bludgeoned U.S. tech firms with a strong presence in Asia in particular. Apple, which depends on China for about 20% of its revenue and extensively relies on the Asian nation to manufacture its phones, is especially vulnerable.
The outbreak of, and response to, COVID-19 has raised several challenges for Apple, including disruption of its China-based supply chain for manufacturing. Apple’s stores outside China are closed until further notice, for example, and many regions in the U.S. are under stay-at-home orders until the end of April.
Analysts are also fearing that the disruption caused by the coronavirus could delay the launch of Apple’s new iPhones, slowing the roll-out of 5G-powered handsets which offer huge growth potential.
But these are temporary challenges which could impact revenue and profit for the next couple of quarters. However, what’s attracting investors to Apple stock is the company’s massive innovation ecosystem and its huge cash hoard.
Cash-rich tech stocks are some of the “best positioned to weather the storm,” Evercore ISI analyst Amit Daryanani said in a note this Sunday. The maker of the iPhone “has the largest net cash position within our coverage,” Daryanani noted. Apple currently has about $207 billion in cash on hand with about $108 billion in both short-term and long-term debt.
Microsoft’s Cloud Advantage
Despite the economic uncertainty created by the coronavirus outbreak, Microsoft is one of those tech stocks benefiting from the increased demand for connectivity in this work-from-home environment.
The biggest reason to have a long-term bullish view on Microsoft's stock is that businesses and governments will continue to spend on their transition to cloud computing — the company's key growth area in recent years.
“We have seen a 775% increase of our cloud services in regions that have enforced social distancing or shelter in place orders,” Microsoft said in a blog post on Sunday.
The Microsoft Teams app, which enables people to hold video calls and exchange chat messages, had added 12 million more daily users in the course of one week, for a total of 44 million, the company said. And yesterday, Microsoft introduced a version of its Microsoft 365 bundle that will make Teams available to consumers.
People also continue to use the older Skype app, which has 40 million daily users, up 70% from one month ago, Microsoft said.
After all the upheaval in the equity markets over the past month, Microsoft shares are back in positive territory for this year, up more than 1%. The stock closed yesterday at $160.23 after jumping 7% in a broader market rebound. It was one of the best performing tech sector stocks last year, delivering a return of 60% to investors.
Bottom Line
Apple and Microsoft are both among the most resilient tech giants best positioned to survive through the economic downturn due to the strength of their product offerings and their robust balance-sheets.That said, it’s clear that Apple is facing more potential disruption to its supply chain than Microsoft, making it a riskier bet in the short-run.