Yesterday a momentous event occurred in the technology industry. Apple became worth more than Microsoft. Microsoft, the powerhouse of software for half a generation, is now losing to a company that just a 15 years or so ago was virtually worthless and begging its founder to come back and run the company. Run he did. Under Steve Jobs Apple has created the iPod, iPhone, and now the iPad. Though I’m far from a fanboy, I can’t deny these products are amazing in their simplicity and deserve much of the credit they receive.
But should Apple really be worth more than Microsoft? In their latest quarterly results, Microsoft had Apple beat hands down. The three statistics below are the companies’ revenue (aka sales), net income (aka profit), and cash flow (from operating activities). The cash flow is basically how much cash they brought in that quarter, which is different than profit.
| Billions | AAPL | MSFT |
| Rev | 13.5 | 14.5 |
| Net Income | 3.1 | 4.0 |
| Cash Flow | 2.3 | 7.4 |
| Billions | AAPL | MSFT |
| Rev | 13.5 | 14.5 |
| Net Income | 3.1 | 4.0 |
| Cash Flow | 2.3 | 7.4 |
By these measures (and many others) Microsoft is clearly doing better than Apple. If you were to value Apple based on these metrics Apple would actually be worth quite a bit less than Microsoft. Not equal, not kind of close, but billions of dollars less. So what gives?
When an investor values a stock, they aren’t just looking at how well a company is currently doing, they’re also looking at how well it may do in the future. A fundamental valuation of a stock is the present value of all future cash flows. Future cash flows may be difficult to predict, but someone can be reasonably sure of something. Investors are speaking with their money and saying they expect Apple to make more in the future than Microsoft.
And I have to agree with them. Microsoft has done very well with products like Windows and Xbox. But the industry expects the future to be with mobile products. Microsoft has mobile products on the market and more very close to release, but they aren’t getting the sales Apple gets. And Apple has a other sources of future earnings other than the products themselves: money from apps and music, and coming soon to an iPhone near you – ads.
This blog doesn’t exist to talk much more about such things, but Apple’s passing of Microsoft in total company value did give me a good opportunity to talk about market capitalization and explain a bit more about how institutional investors look at stocks. But, I wouldn’t place bets on either of these guys losing this race yet, and actually love that they are both on the market. My house is split down the middle with Apple and Microsoft products, and I can’t wait to see what’s next from both of them.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
