What two share prices imply: reading Apple and Microsoft side by side
Apple and Microsoft are worth roughly the same on the stock market. Run each valuation backwards and the growth each price needs turns out to be close too, about 19% and 20% a year for five years. What differs is the record behind it: one company has been growing operating income at 8% and the other at 17%. This lesson puts the two reverse valuations next to each other and shows what the comparison can and cannot say.
- Level
- Beginner
- Reading time
- About 21 minutes
- Know this first
- Capital spending, free cash flow and payouts
By the end you will be able to:
- run the same reverse valuation on two companies with their own reinvestment rates
- compare the growth each price needs with each company's recent growth
- say how much the answer depends on the discount rate, reinvestment and the date of the price
- avoid reading a gap between two implied growth rates as a verdict
Two prices, one question
The lesson on what a share price implies ran a valuation backwards for Apple: it held the discount rate and the long-run assumptions fixed and solved for the growth that makes the cash flows add up to the market value. This lesson runs the same method on two companies at once. Apple and Microsoft are about the same size on the stock market, both report in dollars under US GAAP, and the same five-year valuation can be applied to each. The question is whether the two prices ask for the same thing.
The answer at the starting settings is that they ask for nearly the same growth, 18.7% a year for Apple and 19.9% for Microsoft. The interesting part is not the number but what it is set against. Apple's operating income grew 8.0% in its latest year and Microsoft's grew 17.4%, so Apple's price asks for far more than it has just delivered, and Microsoft's asks for a little more. The rest of the lesson shows where the figures come from and how fragile the comparison is.
The starting points
Each reverse valuation needs a market value of the business, a starting level of after-tax operating profit and a share of that profit reinvested in the forecast years. The market value of the business is the market value of the shares less net cash, which is cash and investments less borrowings. The shared assumptions, which the calculator lets the reader change, are an 8.9% discount rate, 3% growth for ever after year 5 and a 20% return on new investment after year 5.
| Starting point, $ billion | Apple | Microsoft |
|---|---|---|
| Market value of shares | 3,253.4 | 3,100.0 |
| Less net cash | 33.8 | 51.4 |
| Market value of the business | 3,219.6 | 3,048.6 |
| After-tax operating profit, latest year | 112.3 | 105.9 |
| Profit reinvested, two-year average | 10% | 29% |
| Operating income growth, latest year | 8.0% | 17.4% |
The market value of the shares is taken from the cover of each company's annual report, where it is stated as the value of shares held by people who are not company insiders. Apple's is $3,253.4 billion at 28 March 2025. Microsoft's is stated only as about $3.1 trillion at 31 December 2024, so the figure used here is approximate. Two things follow. The two prices are three months apart, and Microsoft's is rounded to the nearest hundred billion. The calculator therefore lets the reader move either value.
Reinvestment is taken from each company's cash flow statement: capital spending less depreciation, plus the cash absorbed by working capital, as a share of after-tax operating profit. Averaged over two years it is 10% at Apple and 29% at Microsoft. Microsoft's reinvestment in its latest year alone was 33.8%, so the two-year average is a choice that makes the starting point a little less demanding. A higher share reinvested means less free cash flow in the early years, and so more growth is needed for the same value.
Run both valuations
The left page of the ledger shows what Apple's market value needs and the right page shows Microsoft's. Each side gives the yearly growth in after-tax operating profit, the profit it reaches in year 5, how many times today's profit that is, and how far the growth needed is above the latest year's growth in operating income, in percentage points. A negative number there means the price needs less than the company just delivered. If no growth rate between −50% and 100% a year can make the numbers meet, the ledger shows n/a.
Apple's market value needs after-tax operating profit to grow 18.7% a year for five years and Microsoft's needs 19.9%. Operating income grew 8.0% at Apple and 17.4% at Microsoft in the latest year, so the price asks 10.7 points more than that at Apple and 2.5 points more at Microsoft.
Five experiments. First, at the starting settings Apple's price needs 18.7% a year, taking its profit from $112.3 billion to $264.3 billion, 2.35 times today's, and Microsoft's needs 19.9%, taking its profit from $105.9 billion to $262.4 billion, 2.48 times today's. Against the latest year the gaps are 10.7 points for Apple and 2.5 for Microsoft. Second, lower the discount rate to 7%. Apple needs 8.9%, only 0.9 points above what it delivered, and Microsoft needs 9.8%, which is 7.6 points below what it delivered, so at a lower rate Microsoft's price asks for less than it just achieved. Third, raise Microsoft's reinvestment to 34%, close to the 33.8% of its latest year, and its growth needed rises to 20.2%. Fourth, set the return on new investment after year 5 to 40% for both and Apple's falls to 17.0%, since growth beyond year 5 is then worth more. Fifth, lower Microsoft's market value to $2,800 billion and its figure drops to 17.3%.
What the comparison shows
The two prices need almost the same growth, 1.2 points apart, but they sit at very different distances from the record. For Apple the distance is 10.7 points, which means the price assumes growth more than double what operating income just delivered. For Microsoft it is 2.5 points. Put another way, the same required growth is a stretch for one company and close to its recent pace for the other.
This is a statement about one year. A single year of operating income growth can be unusually high or low, and neither company is forced to repeat it. Averaged over a longer period the picture could be different, and the data used in this lesson do not go back far enough to say. What the comparison gives is a reason to ask: if a price assumes growth well above what a company has just delivered, what is the case that it will speed up?
It does not say that either price is right or wrong. Both companies are far larger than most businesses. The market's own view, or an analyst's, may rest on a longer horizon, on a lower discount rate, or on higher returns than the lesson assumes, and each of these is an assumption that can be examined.
The discount rate again
As in the single-company lesson, the discount rate moves the answer more than anything else. The table shows the growth each market value implies at four rates, with everything else at the starting settings.
| Discount rate | Apple | Microsoft | Microsoft less Apple, points |
|---|---|---|---|
| 7.0% | 8.9% | 9.8% | +0.9 |
| 8.0% | 14.4% | 15.4% | +1.1 |
| 8.9% | 18.7% | 19.9% | +1.2 |
| 10.0% | 23.4% | 24.8% | +1.4 |
At every rate in the table Microsoft's price needs slightly more growth than Apple's, partly because of its higher reinvestment, which takes more of its early cash flow. At 10% the pair needs 23.4% and 24.8%, far more than at 7%. At 7% Apple's figure is close to the 8.0% it delivered in its latest year and Microsoft's is well below the 17.4% it delivered. A reader who finds Apple's price demanding should first ask whether the cause is the price or the rate.
The date and the precision of the price
Two details of the inputs matter more than they appear. The first is that market values are for different dates: Apple's is from March 2025 and Microsoft's from December 2024. Share prices move, and a reverse valuation of either company today would use today's price. The second is that Microsoft's filing states its figure only to the nearest hundred billion. The table shows how much that rounding alone could move the answer.
| Microsoft's market value | Implied yearly growth | Points above its latest-year operating income growth |
|---|---|---|
| $2,800 billion | 17.3% | −0.2 |
| $3,100 billion | 19.9% | +2.5 |
| $3,400 billion | 22.3% | +4.9 |
A move of $300 billion either way in Microsoft's value changes its implied growth by about two to three points. So the 1.2-point difference between Apple and Microsoft at the starting settings is smaller than the change that one input produces, and it would be wrong to draw a conclusion from it. The better reading is that the two prices need similar growth, and that the more useful comparison is each one against its own record.
What this comparison cannot tell you
- It uses shared assumptions. The same discount rate, long-run growth and return on new investment are applied to both. Businesses with different risks would not use the same rate.
- It uses one year of record. Latest-year operating income growth is a noisy yardstick for either company.
- It uses one growth rate for five years. A real path would start in one place and end in another.
- The prices are not simultaneous. They are three months apart, and one is rounded.
- Net cash is a simplification. Leases, investments in other companies and other items are not in the bridge from the market value of the shares to the market value of the business.
Common mistakes
Reading a small gap as a finding
A gap smaller than the uncertainty in the inputs says nothing. The dates and rounding of the prices alone can be larger than it.
Comparing implied growth with a different measure of growth
The model grows after-tax operating profit. Comparing its output with revenue growth or share-price growth is comparing different things. Operating income is the closest yardstick here.
Giving both companies the same reinvestment
A company that has to invest more to grow needs more growth for the same value. The shared rate hides this.
Treating the implied growth as a forecast
It is the growth that fits the price under the chosen assumptions, and does not describe what anyone expects.
Using prices from different days without saying so
A comparison is only as good as the date alignment of its inputs. When the dates differ, say so and test the effect.
Try it yourself
1. A company's shares are worth $3,000 billion and it has net cash of $100 billion. What is the market value of the business?
Show the working
3,000 − 100 = $2,900 billion. The net cash belongs to the owners, so the operating business is worth the rest.
2. Two companies' prices both need 19% yearly growth. One grew 17% last year and the other 8%. Which price asks for more?
Show the working
The second, which needs 11 points more than it has just delivered, against 2 for the first. The needed growth is the same, and the distance from the record is not.
3. Microsoft reinvests a bigger share of its profit than Apple does, and the other inputs are the same. What does that do to the growth its price implies?
Show the working
It raises it. More reinvestment leaves less free cash flow in the early years, so more growth is needed to reach the same value. The calculator shows this in the third experiment.
4. One company's price is from March and the other's is from December. Why does that weaken the comparison?
Show the working
Share prices move, so the two figures describe different moments. A comparison needs the inputs to be on the same date, or an allowance for the difference, as in the table of Microsoft's market values.
Where this is used
- An analyst compares what the prices of two competitors need, and asks which is further from its record.
- An investor checks whether a gap in valuation between two companies is explained by differences in growth, reinvestment or the discount rate.
- A board looks at what its own share price needs next to that of a rival.
- A reviewer of a research report asks what growth each target price implies.
Key terms
- Reverse DCF
- A discounted cash flow solved backwards: the price is given and the growth is solved for.
- Implied growth
- The yearly growth that makes the discounted cash flows equal the market value.
- Market value of the business
- The market value of the shares less net cash.
- Reinvestment rate
- Capital spending less depreciation, plus cash absorbed by working capital, as a share of after-tax operating profit.
- Non-affiliate market value
- The value of shares held by people who are not company insiders, as stated on the cover of an annual report.
- Percentage points
- The unit for the difference between two percentages.
Questions people ask
Does this say which company is the better buy?
No. It shows what each price assumes. Nothing in this module is investment advice, and the comparison is one input among many.
Why not just use today's prices?
The lesson uses the dates and figures in the companies' filings so that every input can be checked. The calculator lets the reader enter a different value for either company.
Why do both companies use the same discount rate?
To keep the comparison to one thing at a time. A reader who believes one company is riskier can run the calculator twice with different rates and read one side each time.
Why compare only these two?
They report in dollars under the same accounting rules and are close in size, which keeps accounting and currency differences out of the comparison.
Sources and review
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Apple Inc., Form 10-K for the fiscal year ended 27 September 2025. Source of the market value of shares held by non-affiliates at 28 March 2025, stated on the cover page.
- Microsoft Corporation, Form 10-K for the fiscal year ended 30 June 2025. Source of the market value of shares held by non-affiliates at 31 December 2024 (stated as $3.1 trillion) and of the shares outstanding at 24 July 2025 (7,433,166,379).
How the numbers were checked: net cash, after-tax operating profit, reinvestment and operating income growth for both companies were rebuilt from the filed statements and tied to their totals. The growth each price implies was put back through a separate forward valuation and reproduced the target value, and the calculator, which runs separately, was compared with that code across a grid of inputs.