Microsoft's surprising comeback over Apple is the outcome of two new CEOs with radically different gameplans (AAPL, MSFT)

Microsoft CEO Satya Nadella, Apple CEO Tim Cook

Microsoft briefly overtook Apple this week as the world's most valuable company.
The development speaks volumes about investors' faith in the respective companies' futures and the leaders driving each company there.
While Tim Cook has demonstrated that he's a great manager for Apple, he's repeatedly shown he's "not a product person," and he's left shareholders wondering about the company's next act.
By contrast, Satya Nadella has resolutely directed Microsoft to its next act, and his vision is starting to pay off in a big way.

Microsoft reclaimed the title of most valuable tech company from Apple this week — at least briefly — and the shakeup in the leaderboard says a lot about the direction the companies are heading in and who's leading them there.

Right now, investors seem to have a lot more faith in Satya Nadella than they do in Tim Cook.

And arguably for good reason. Under Nadella, Microsoft has found its next act. He made a big and bold bet on the cloud, and it's paying off.

Meanwhile, at Apple, Cook has left shareholders wondering just what kind of next act the company has after the iPhone — if any.

The concerns about Apple have been particularly acute since the beginning of this month when it announced its latest earnings results. Although the company's revenue and profit topped Wall Street's projections, it sold fewer iPhones than expected and offered a somewhat disappointing outlook for the holiday quarter. Worse, it announced that it would soon stop reporting the number of iPhones and other devices it sells each quarter, leaving many worried that those sales are going to start declining markedly. Since then, those fears have become only more pronounced.

The potential of a decline in iPhone sales is a huge concern for investors because Apple is basically a phone company; the iPhone accounts for more than 60% of its revenue and has for years now. As the iPhone goes, so goes Apple.

Apple has done well under Cook, but he's not a product guy

Cook may be a bit bewildered about the seemingly sudden loss of faith in his leadership. After all, Apple has done extraordinarily well since he took over from Steve Jobs seven years ago. Over that time, both Apple's revenue and profits have well more than doubled. The company has returned hundreds of billions of dollars in cash back to shareholders in the form of stock repurchases and dividends. It became the most valuable and most profitable company in the world, and, at its peak, its market capitalization topped $1 trillion.

Steve Jobs But in truth, the concerns about Cook are longstanding. Apple is a product company, but Cook, as Jobs so memorably told his biographer shortly before he died, "is not a product person." He's great at operations. He's proven to be a good manager, but he's no product visionary.

It's not that Cook hasn't tried. In fact, he's repeatedly attempted to broaden Apple's business with new products. For years, he's pushed iPads as Apple's next big product line. Apple launched the Apple Watch under his leadership. The company's made major investments in automobiles, television, augmented reality, and streaming media under his direction.

But little of that has paid off — or, at least, nothing's been a big enough hit to make Apple noticeably less dependent on the iPhone. After an initial boom, iPad sales declined, then stagnated. The Apple Watch has been a minor hit at best. Apple TV has never been more than a self-described "hobby" for the company.

And the failures and disappointments continue to pile up. Apple Music is stuck in second behind Spotify on a global basis. The streaming-video series the company has released to date have been widely panned, and Apple's big rumored effort to remake the TV industry never materialized. And who knows if or when we'll ever see a production-model Apple car?

Cook says Apple's next act is in services

Despite all this, Apple's stock has held up, because the iPhone has continued to be a cash machine, and the company has repeatedly found ways to juice sales, whether by signing up new carrier partners, by supersizing the device, or by jacking up prices. But those are marketing and business innovations — not really product ones. And now that Apple seems to be running out of such tricks, Cook's shortcomings on the product front are coming back to the fore.

The company's answer to what comes next is that it's becoming a "services" company. It's increasingly been able to convince customers who own its phones and other products to sign up for services such as Apple Music, its iCloud storage service, or its AppleCare warranty coverage. Many analysts expect Apple to launch a streaming video service next year and potentially bundle it together with some of its other offerings as part of a monthly subscription.

To date, though, Apple's success at transforming itself into a services company has been limited. In the last year, it got about 14% of its revenue from services. That was up from 13% the year before and 11% in 2016. That's nothing to sneeze at, but it's not exactly a corporate makeover.

And the company's services effort could prove difficult if its phone sales do start to fall. Fewer device customers would likely mean fewer customers for warranties and other services.

Nadella has shown he's a visionary

That Apple finds itself in this position at this moment is somewhat ironic. The last time it and Microsoft vied for the title of most valuable tech company — back in 2010 — it was Microsoft whose future investors questioned.

steve ballmer microsoft Back then, with Steve Ballmer as CEO, Microsoft was big, blundering, and slow. Like Apple and iPhones under Cook, Ballmer's Microsoft dominated one business — the PC industry — but had repeatedly failed to develop new lines of business and missed out on big new trends.

But then came Nadella. In a sense, he's been for Microsoft what Jobs was for Apple. He's turned the company around and not only given direction; he's given it a new act.

Nadella, who took over in 2014, bet on the cloud, and he's been relentless — ruthless even — at focusing Microsoft on that business. He's shaken up the company's management, organization, and product lines to redirect Microsoft to that opportunity.

And it's paid off — big time. In Microsoft's most recent fiscal year, 23% of its total revenue came from cloud-based products and services. That was up from just 3% four years ago. That's what a rapid transformation can look like.

Microsoft's Azure cloud service has proven to be a formidable rival to Amazon Web Services and is growing twice as fast. Meanwhile, it's becoming a leading player in another part of the cloud market: that for hosting applications in the cloud.

Investors are betting there's more to come. Microsoft is now valued roughly the same — and at times more highly — than Apple, even though its revenue in its most recent fiscal year was less than half of the iPhone makers' and its profit was less than a third.

That's a good indication of investors' faith in Nadella and their enthusiasm for Microsoft's future. It's also a sure sign they think that under Cook, Apple's best days may be behind it.

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