Apple and the Myth of Market Cap

Wayne Rash

I'm sure the champagne corks are popping all over Cupertino today as the word got out that Apple's market capitalization had exceeded that of Microsoft. Microsoft Chairman Steve Ballmer, meanwhile, was quoted in India as saying that this really doesn't matter very much since Microsoft is more profitable. People who play the stock market and were betting on Apple's stock are no doubt delighted, assuming they're planning to sell fairly soon.

But you have to ask yourself if Apple is really worth more than Microsoft or any of a number of other companies in the top-10 range in market capitalization. Apple is selling at something like 26 times earnings, which is pretty expensive. Will it stay there, or is this an example of that 'irrational exuberance' we heard about when the tech bubble burst? After all, Apple is nothing if not good at self promotion, and a lot of people, especially smaller investors, can buy into that without looking at the economics behind the stock value.

Compare that against say, Exxon Mobile, which is still a lot larger than Apple is ever likely to get, and you'll see what I mean. This is an oil company with facilities located globally that provides a product in very wide demand. It's selling at about 15 times earnings which is a much more typical range for large companies. If you look at the other measures of a company's valuation, including its book value, you'll see that Exxon Mobile is worth vastly more than Apple.

So why the big deal over Apple's sudden rise in market cap? Partly, I'm sure it's surprise. After all, who'da thunk that Apple would ever be bigger than Microsoft? After all, Microsoft is running on something like 90 percent of the computer platforms on the planet. Apple is running on something like 6 percent. Of course, Apple is getting its numbers from the iPhone and iPad rather than its small share of the computer market.

I'm sure it's also part of Apple's skill at self promotion. Its stock is worth a lot because people believe it should be worth a lot. After all, Apple has the iPad. What does Microsoft have? In reality, Microsoft has a lot, but that's kind of beside the point. Today's story is Apple's huge jump in market cap.

But with valuations like this that resemble the pre-bubble tech market, you have to wonder how long it can be sustained. Will the next week bring the realization that Apple's stock is really pretty expensive? Will there be a discovery that a stock selling at 26 times earnings is probably trading at a level that's not sustainable?

I guess we'll see. But in the trading days to come, I suspect we'll see that the run up in valuation will lead to a sell off by those who were in the stock for just such an eventuality. At some point, the market cap will return to more reasonable levels, and once again Microsoft will be larger.

And then, of course, comes the next question, which is whether it matters at all. Nothing in Apple's market cap will change the products the company is selling, or how it sells them. Nothing in this will change the progression of Windows 7 at Microsoft or the iPhone-derived products at Apple. Except for those people who are taking their profits with this rise, nothing will really have changed.

In other words, the hype that's surrounding this is just that. It doesn't actually mean anything for the long term of either company. So while a few people will get rich, and a few more will get poorer, the end result is going to be that market cap really doesn't mean much to anyone else. So chalk it up to one of those fun facts that a volatile stock market creates, and drink a toast to Apple for pulling it off. Just be careful where you put your money.


(Disclosure note: I don't own stock in either Apple or Microsoft. We tech journalists aren't allowed to own stock in the companies we write about. So while everyone tries to guess the market moves of Apple and Microsoft, I'll just sit and watch you all have fun.)



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May 28, 2010 2:05 PM iphonerulez iphonerulez  says:
Apple's share price and not the little investor. It really is so strange to all of a sudden to start hearing that market cap no longer means anything. It's like the dollar is only worth a certain amount if it belongs to a particular company. Microsoft's value can never drop because it has 90% of the desktop market? What is the guarantee that the desktop will always be the most important platform? So, even if Apple's market cap goes up to about $280 billion, it still won't be as valuable as Microsoft because Apple's products aren't as important as say, Microsoft Office or Windows 7? I'm getting more and more puzzled over what decides a company's true value. I'm personally happy if Apple goes up to $300 a share because I'll be able to sell off shares for more money even if the shares aren't really worth $300 a share. Somehow I thought that's what was the most important thing was for investors. Reply
May 28, 2010 2:05 PM Thunderdome Thunderdome  says:
You say, "I�m sure it�s also part of Apple�s skill at self promotion." yet MS spent twice as much on advertising as Apple last year. Apple's products are self promoting. People use them and love them. They use them and they are hooked. Think of how Apple advertises the iPhone. It shows a real person using a real iPhone. The product speaks for itself. It's the antithesis of hype. Apple doesn't have to do much beyond that except make them available in an attractive environment, i.e. the Apple stores. Now think about how Droid advertises it's product: stealth bombers, robot arms, computer generated graphics, with discreet disclaimers that the screen image is simulated. Forget the fact that Apple has had one record breaking quarter after another, even in the middle of a recession. The fact that there will be 100 million iDevice users by the end of the year. The fact that the iPod completely dominates it's market after 9 years of iPod-killers, the iTunes music store is the world/s largest online music retailer, the iPhone continues to grow with obscene profits and the demand for the iPad is accelerating, despite the fact that everyone else has failed in this category for the last decade. The market cap of any company is a symptom. In Apple's case it is a symptom of the fact that they are staking out a major position in the post-PC era of cell-phones and tablets, and no one seems to be able to stop them. Android is giving them competition in the cell area, but Google makes no money off of Android licenses while Apple makes money off of every phase of the iphone: the hardware, the apps, the peripherals, the e-books, the music, the movies and soon the advertising. And no one is competing against the iPod touch or the iPad, and the iPod touch already counts for around 30 to 35 million users out of an 85 million iDevice user base. By the end of the year, there will easily be 100 million iDevice users. Who cares what the market cap is, companies and content owners and developers ignore those kind of numbers at their own risk. Reply
May 28, 2010 2:05 PM Anonymous Anonymous  says:
I don't know where you're getting the 26X earnings figure... Apple is estimated to earn $13.32 this year, which as we saw from the last blow out quarter those estimates are way too low...That puts Apple trading right about 18x earnings for 2010...Minus out their cash horde of $40 billion and you're talking a PE of roughly 15 for a company that just put up a 49% increase in earnings last quarter.. Looking ahead to next year the estimates are for $18-$20 a share...If they hit $20 a share we're looking at a stock currently trading at 12 times earnings.....Minus out COH that drops to about 9X earnings... Looks cheap enough to me... As for Exxon and Microsoft they are growing in the single digits and priced accordingly... Reply
May 28, 2010 2:05 PM torbakhopper torbakhopper  says:
not sure why you used exxon as your example. their "product" has been relatively unchanging over time at some basic level. iPAD stands to change the entire face of global business (not in the u.s. at first) and entertainment activity. places like south korea get free tv all the time from the government. imagine commuters. it's not a hard vision to see... netflix is already an awesome way to do just the same thing in the u.s. but this tool can give huge governmental control over perspectives in undeveloped countries. plus hotels, restuarants, etc. the applicational work value of the iPAD is mind boggling. don't expect U.S. fatties to know what to do with it. most u.s. folks don't even know what to do with the equipment they already have. Reply
May 28, 2010 2:05 PM Mike Mike  says:
2007 when MS launched Vista, Apple launched iPhone, 2010 when MS launched an Office update, Apple launched iPad. Market cap is the result of a cumulative effect AND MARKET PERCEPTION of a series of hundreds of corporate decisions. Apple has simply been making better decisions on where to put their resources and where to move their company business. Reply
May 28, 2010 2:05 PM Bill S. Bill S.  says:
Have you got a source for that "fact"? Everywhere I check shows current and forward P/E much lower than 26. I'd hate to think you spent all your time arguing off faulty data. Reply
May 28, 2010 3:00 PM Anonymous Anonymous  says: in response to Thunderdome
booyah. Apple products sell themselves! Reply
May 28, 2010 3:05 PM lrd lrd  says:
It seems to me that both companies can be successful at meeting different market sectors: Apple leads on the consumer side; with some/little enterprise support and, Microsoft leads in the enterprise with some/little consumer support. But, one thing can be said, when it comes to innovation Apple blows the pants off of Microsoft. Microsoft's core product, Windows, is a testament not to Microsoft's ability to innovate but its ability to imitate years of Apple's innovations. Reply
May 28, 2010 3:05 PM pwner pwner  says:
First and foremost, everyone is comparing two vastly different companies. One is a software company for PCs that occasionally dabbles in gadgets, the other is a GADGET company with a small share of the computer market. And even in the computer market, MS makes an OS, apple makes an OS preinstalled into one of their own machines. Not quite the same animal. So in short, this whole comparison is nonsensical. "Apple is the Lexus, the BMW, the Lamborgini and the Picasso of computers." ROLFMAO!!! No one's arguing that MS's advertising doesn't pale in comparison to Apple's mean propaganda machine, especially considering how much each spends. But here are the facts. First, let's just consider hardware. Apple's run on the same Intel/NVidia/ATI chips that PCs do; there are just some superficial differences in things like their BIOS (EFI) etc, that are mainly there to stop their OS from easily running on a PC. To prove this, consider that 1. Macs can run Windows and 2. (Apple's dirty little secret) PCs can run MacOSX! (either natively or via VMWare; google hackintosh or kalyway if you don't believe me); If Apple really made superior or even different hardware, this would not be possible. And mind you, MacOS performs quite well on a PC; I ran a simulation program on my PC (split-step Fourier nonlinear Schrodinger equation solver, in case you're interested) and the same code on my colleague's similarly equipped Core 2 Mac (both compiled with gcc) and got 15% better peformance on mine. And considering that my PC cost 40% less than his Mac, well, it doesn't take a rocket surgeon [sic] to figure out which one has better value. And as for the OS, well, if you compare Snow Leopard to Windows 98, then you have a case, but sorry to say, that MacOS suffers from the same flaws as Windows 7 (source: macfixit.com and my own and many other's experience). Not to say that OSX is bad, it's a quite viable alternative to Windows and I would support if if Apple stopped with their stupid protection schemes and just allowed it to run on any machine (which would of course cause their overpriced-PC sales to plummet), but sorry Mac fans, it just isn't better than Windows 7, no matter how much you insist it is. Telling me my machine is slow, unstable, hardware incompatible (particularly comical coming from mac users), and is constantly being infected doesn't make it so. The last time my machine crashed on me was 4 months ago and that was only because I was running a kernel debugger (which most mac users wouldn't know what that even is). Anyway, going back to the article, Apple is bigger because of its gadgets; this factoid has no bearing on the computer market and moreover, it makes it harder to view Apple as the underdog anymore, which has been an important part of its ever-so-important image. Reply
May 28, 2010 3:05 PM Brian Brian  says:
Apple is still a growth stock, and a real technology company. MS doesn't care about the technology, just the bucks, this is why their products are always cut rate imitations. You say EXXON has a product in wide demand. So does Apple, but Microsoft does NOT have a product in great demand, they merely have one that is 'good enough'. People are demanding the Mac OS now, or the iPhone or iPad, not Windows. It doesn't matter that currently a lot of people have settled for an OS that looks like it was designed by a committee at the FBI. Apple is ahead now because they have far more potential not only in mobile devices, music, video, etc... but also in desktops. In fact, for the past year or more, 91% of all computers costing over $1000 worldwide, were Macs. MS is selling the Walmart quality experience. Apple's customers are professionals, etc.... this is another reason they did so well during the recession--their customers for the most part are well employed, etc... whereas those who have settled for Windoze (to save $50 or whatever upfront, and end up playing more in the long run) that is the 90% you are talking about, those people are not wanting to go though the Windoze 'experience' again. Is any of this making any sense to you? Thanks for reading. Reply
May 28, 2010 3:05 PM BladRnr BladRnr  says:
Maybe the question is: how did MSFT drop from a market cap of ~$550B? MSFT has nothing going for it, outside of two cash cows: Office and Windows. And how long do they have when everything is going mobile? Name another hugely popular profitable MSFT product? Bach and Allard were let go because as popular as the Xbox is it lost billions. Windows Phone 7? Too little, too late. Apple has shipping products that are hugely profitable with increasing demand for them. The iPad is pretty much sold out on a daily basis because Apple is ramping up for other countries. I tried buying two in Columbus, OH this week and there were five total at one lone Best Buy that had just arrived. By the time I got there two of them were sold, I got two and the other one was sold in to a guy right behind me. So five iPads sold in less than 40 minutes. Who else has a product like that? The iPad is the next big thing in computing, and MSFT has no answer for it. They don't control what HP and Dell make so they are stuck waiting to make the software (has to be Windows, right?) for a device that doesn't exist. Good luck with that strategy. Wait until the next quarterly earnings report. Apple will then exceed MSFT's earnings, because Apple will have millions of iPads that they will have sold. These are cold hard numbers the Windows technocrati don't want to believe it. CTOs need to wake up and realize that Apple is not what they were 10 years ago. Yes, they sell mostly to consumers, but iPhones, and iPads, are coming to work in droves. IT needs to get off their Windows high-horse and start thinking outside the box in terms of how their workers can be more productive with Apple products. Reply
May 28, 2010 3:05 PM veggiedude veggiedude  says:
A small correction: "Microsoft is running on something like 90 percent of the computer platforms on the planet." Should read: Microsoft runs on about 90% of all computers worldwide. They run on PC's made to run Windows. The Mac is designed to run two, Mac OS X and Windows. If the author thinks Apple's business model is not sustainable, does he think the same of Sony and other companies of electronic consumer products? Reply
May 28, 2010 3:05 PM Brian Brian  says:
I think this guy is still using pre-iPhone deffered income figures, that could explain some of his eggregious errors, but that would mean his source were, what, 5 months old? Forward P/E is 16.58. It's a BARGAIN. If it were Google performing like this, the price would be $1000 a share. Apple never gets any credit, I have NEVER seen it 'overvalued' not even in the late 90's. Too bad so many, such as the article author, have been so MYOPIC about this though! It's like being MYOPIC about M$ in their 80's heyday. That ship has sailed, but Apple is still going strong and will continue after Steve Jobs, you can bet on that. Reply
May 28, 2010 5:05 PM Alex Smith Alex Smith  says:
Apple surpassing Microsoft means one thing: - The past is dead. - Long live the future. Apple of course. Microsoft relied its success in copying Apple. That did not last forever. Microsoft failed to copy... err innovate enough. They thought they could, but obviously they can't. (If you don't believe it, just see their Windows Mobiles Phones). What some people fail to see is that the future of computing is here. And the future is iPhonish and iPad-like. As they say, is not the end of Microsoft, it might not be even the beginning of the end, but perhaps its the end of the beginning... And the true hero behind the personal computer revolution (Apple), gains back the place it deserves! A very Happy ending, indeed. Reply
May 28, 2010 5:05 PM SteveS SteveS  says:
I can't help but detect a tone of sour grapes coming from the author here. That's a shame. Anyway, yes, Apple's PE ratio is at 25 today which of course is not uncommon for growth stocks. Anyone who is even remotely familiar with Finance / stock analysis (hint: the author apparently does not) understands that the standard PE ratio doesn't account for growth. That's why the PEG ratio was invented. (price / earnings) / earnings growth rate. Apple currently has a PEG ratio of 1.15, Microsoft's is 1.48. In other words, based on earnings and growth trends, Apple's stock is undervalued compared to Microsoft's. Microsoft is a very profitable company. The problem is, they are not dynamic and they have yet to demonstrate they are capable of competing outside of a given monopoly environment. Microsoft's cash cows have been Windows OS and Office. Outside of that, every other venture for them has not worked out. The problem here is that the PC market is mature and there is little growth. By contrast, Apple has demonstrated significant growth outside of it's core areas (Mac hardware sales). Growth right now is in the mobile market where Apple has the best products. Microsoft has been crashing miserably in the mobile market despite a large head start. Kin is exactly the disaster which demonstrates Microsoft doesn't have a strategic plan. Simply copying Apple with Windows phone 7 isn't enough. Microsoft's traditional parters are cozying up to Android based devices and Microsoft's biggest partner, HP, just bought Palm. So much for the HP slate running Windows 7 that Ballmer introduced. In short, stock price is based on both actual performance and future predicted performance (growth). Given the trajectory of both Microsoft and Apple, it shouldn't be any wonder why Apple has passed Microsoft in market cap. Reply
May 28, 2010 6:05 PM mark mark  says:
Both Apple and Microsoft are platform companies. Microsoft created a PC platform just before PCs exploded in the late 90s. Apple has created a mobile device platform just as mobile devices are about to explode this year. As a platform, both rely on software and content developers to create apps and content for their platforms. They only differ in business model - Microsoft is a software company that licenses their platform to hardware vendors at a low ASP but with a high margin, while Apple is a consumer electronics company that sells gadgets to consumers at a higher ASP with lower margins (though still quite high relative to other consumer electronics companies). Thus, Microsoft needed to license to hundreds of millions of units to be hugely profitable; Apple needs to sell tens of millions of units to be hugely profitable. With the mobile device market just starting on major growth, and with Apple's headstart with iPhone/iPod touch/iPad, it's easy to see that Apple is worth way more than Microsoft. Reply
May 28, 2010 6:38 PM prak prak  says: in response to pwner
@pwner, You make some good points, but I disagree where you say "If Apple really made superior or even different hardware, this would not be possible." Oh, I agree to a point, but if they made amazingly superior hardware, it ought to be able to still run Windows. The PowerPC was vastly superior to the M68K line, and hardware and software virtualization have progressed quite a bit since then. But, you're right to say that apple's core hardware is no different than the core hardware in many other machines.
However, I dispute that this is the only indicator of "superior". I can play a Beethoven sonata on a crappy upright piano in a nursery school, or I can play it on a Steinway Grand. The hardware in both cases is largely the same, with the same interface and the same basic technology, etc. But the steinway grand is by far superior, even though inside it's just the same hammers and strings.
I'm quite happy with the build of my macbook pro. I run windows servers and desktops and VMs at work. My manager is irritated that the current macbooks have internal batteries, and I couldn't care less, as long as I get a 7 hour battery that lasts 5 or 6 years. I'm just giving this as an example to show that different people look for different things. I don't contest your good Windows 7 experience, nor the goodness of that experience in general, nor that there is very good hardware out there that runs Windows better than a Mac. But each of us looks for different things, and in some ways, I'm willing to pay a bit more for Apple hardware. But if you're not, why then, that's what you should do! PS: I thought it was a bit disingenuous saying that most mac users wouldn't know a kernel debugger; neither would most Windows users! And I haven't rebooted my macbook pro for 74 days, and it's moved every day and has stuff plugged in and out of it constantly. So it's pretty damn stable too. Reply
May 28, 2010 8:05 PM Anonymous Anonymous  says:
Wow there sure is a lot of you Apple fanboys trolling the web. http://www.lockergnome.com/dannyminick/files/2010/01/34jan29-fanboy.jpg Reply
May 29, 2010 2:05 AM nangz nangz  says:
tech writers write on 3 types of events - past, present & future. it seems the author doesn't understand the future, trying to ignore the present, while steadfastly hanging on to the past. Reply
May 29, 2010 5:05 AM OldGrouch OldGrouch  says:
Unless the oil/energy company has suddenly branched out into vehicle manufacturing, it's ExxonMobil, not ExxonMobile. Reply
May 29, 2010 7:05 AM Victor Panlilio Victor Panlilio  says:
Exxon Mobile? Do they also make cellphones for the oil industry? It's ExxonMobil, and its stock ticker symbol is XOM. The author's premise, sadly, is speculative drivel. Reply
May 31, 2010 5:05 PM 20 years old investor 20 years old investor  says:
@ author: Apple does not really trade at P/E of 26 if you include the enormous cash it is hoarding(US$41.7 Billions) yes sir,cash as well as liabilities are priced into the stock....even novice like me must know that... And yes Microsoft blows Apple away in terms of in earnings... Reply
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