Both Apple (AAPL -2.54%) and Microsoft (MSFT -0.14%) touched market capitalization values over $1.5 trillion this week, and the next stop could be $2 trillion. Such sky-high valuations may seem way out of reach, but several analysts have already laid out cases for the two tech giants to reach the $2 trillion milestone.

While both stocks have made adding about $500 billion to their market caps look easy over the last couple of months, the next $500 billion might be harder to come by. Let's take a look at the growth prospects of each company and their respective valuations.

A hand drawing a chart showing an upward trend.

Image source: Getty Images.

What's driving Apple to an all-time high

Apple shares recently surged past their previous all-time high (set back in February), despite a slowdown in iPhone sales and production amid the coronavirus pandemic. The story for Apple recently has been its services revenue. 

App Store revenue is booming as people stay at home. Analyst Katy Huberty expects increased App Store downloads and in-app purchases to bring in an extra $500 million in revenue for Apple's third fiscal quarter. And if that revenue is driven mostly by subscriptions, as has been increasingly the case for Apple, it could mean a permanent step up in revenue for the high-margin services business.

Meanwhile, there's pent-up demand for Apple's devices. Wearables like AirPods and the Apple Watch ought to continue growing unit sales. Analyst Dan Ives expects AirPod sales to reach 85 million this year, up from the 65 million he estimates Apple sold last year.

The iPhone could see a major upgrade cycle later this year as Apple incorporates 5G antennae into its design. Ives estimates that 350 million iPhones are due for an upgrade. With lots of consumers foregoing device upgrades while Apple Stores were closed around the world, some may remain patient, waiting for Apple's annual iPhone announcement in September. Additionally, Apple may have to delay the next iPhone release, after supply chains came to a halt earlier this year. So, iPhone sales may be depressed until the end of the year.

Microsoft's work-from-home boost

Microsoft's software and services are closely tied to enterprise environments, and computing capabilities have never been more in demand. The shift to working from home has been a major boon for two key components of Microsoft's business.

First, its cloud computing business, Azure, could be a major winner among cloud computing options. While Microsoft still trails's Amazon Web Services by a wide margin, its position as an enterprise cloud solution and the fact that it doesn't compete with most of the companies it serves could help it catch up in the current environment.

The Wall Street consensus view is for Azure revenue growth to slow considerably over the next few years. While Azure revenue grew 59% in Microsoft's fiscal third quarter (which ended in March), analysts expect the growth rate to drop to 42% for fiscal 2021 and into the mid-30% range in 2022 and onward. That would be a faster deceleration than Amazon experienced as it scaled in recent years.

Microsoft's user-facing cloud solutions for Office, including its Teams software, could be a beneficiary of increased working from home as well. Distributed workforces make the subscription software as a service more valuable for businesses as it enables employees to work from any computer. The integration of Microsoft Teams -- its workplace communications software -- into the Microsoft 365 subscription further strengthens the offering, keeping churn low.

A look at valuations

While it's one thing to have growth catalysts on the horizon, that doesn't mean much if the potential growth is already priced into the stock.

The market currently values Microsoft higher than Apple in terms of price-to-earnings ratio and enterprise value to free cash flow. That said, Microsoft has grown both earnings per share and free cash flow considerably faster than Apple over the last five years, and analysts expect that trend to continue. The Street consensus calls for 15% compound annual earnings growth for Microsoft over the next five years versus about 11.5% for Apple.

AAPL EV to Free Cash Flow Chart

Apple vs. Microsoft Valuations, data by YCharts.

Both tech stocks are trading at or near valuation levels they haven't seen for over 10 years, which makes them both somewhat risky. Investors are betting on continued multiple expansion as catalysts at both companies hold the potential for accelerating revenue growth and margin expansion.

If I had to pick one to reach a $2 trillion market cap first, it would be Microsoft, based on a history of trading nearer to its current P/E valuation and the thought that the Street may be underestimating the potential growth of Azure going forward. But the case could be made for either stock.