Windows & .NET Watch: When the market speaks
July 1, 2010 —
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Apple has a greater market capitalization than Microsoft. Market capitalization is basically a function of investors’ collective estimate of future profits. The market is seeing a greater future for Apple than Microsoft. Rational, or reality distortion field?
In 2009, Microsoft made US$14.6 billion in profit on $58.4 billion in revenue. Apple made $8.2 billion on $42.9 in sales. That’s 78% more sales than Apple and a profit margin of 25% as opposed to Apple’s 19%.
To reach Microsoft’s profit level at its current margin, Apple would have required sales of $76.4 billion (an increase of 78%). For Microsoft to have made Apple’s profit, their revenue would have had to been “just” $32.8 billion.
Yet the price-to-earnings ratio shows that investors are willing to pay a lot more for a piece of Apple’s pie. As I write this, AAPL’s P:E is over 22 while MSFT’s is hovering under 14. In other words, to own a dollar of Apple’s yearly revenues will cost you $22. Microsoft’s P:E puts it in the same ballpark as IBM, Coca Cola and Walmart, while investors are betting that Apple’s revenues will increase dramatically. The price-to-earnings ratio, more than share price or even market capitalization, speaks to the different perceptions of the company by investors.
If not revenue increase, the other way to justify a higher P:E is to anticipate better profit margins, but it’s surely harder for Apple, whose revenue comes with manufacturing costs, to dramatically increase margins than for a software company such as Microsoft. (Google, which enjoys a similar P:E to Apple, has an even higher profit margin than Microsoft.) At these volumes, even significant revenue windfalls (such as the bump Microsoft will get this year from Windows 7 and Office 2010, and that Apple will get from the iPad’s launch frenzy) don’t justify such gaps.
All of which is to say that the market is betting that the game is going to change. Microsoft changed the world of general computing several times, but the last time they did so was in the game of office software. While Microsoft’s Internet and cloud initiatives have shown an admirable ability to "turn the ship,” its leadership in those fields, much less its dominance, is not a given. Apple, on the other hand: iPod, iPhone, iPad. Pretty good decade.
Related Search Term(s): Apple, Microsoft
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