When I dug into the numbers I became even more surprised. As the NY Times article on the subject says:
"The companies have comparable revenue, with Microsoft at $58.4 billion and Apple at $42.9 billion. But in their most recent fiscal years, Apple had net income of $5.7 billion, while Microsoft earned $14.6 billion.
"Microsoft has more cash and short-term investments, $39.7 billion, to Apple’s $23.1 billion, which makes the value assigned by the market to Apple, essentially a bet on its future prospects, all the more remarkable."
Are you as surprised as I am that the market is valuing the company with $15.5 billion greater in-place revenue and $9 billion greater in-place net income as being LESS valuable than the other? Do you believe that Apple's future prospects mean it will be more profitable than Microsoft in the near future, or that Microsoft's profits will diminish below Apple's?
Another stat is that Microsoft's price to earnings ratio is about 13:1 right now, while Apple's is about 22. For comparison the average for the S&P 500 is something like 14 I believe. So Microsoft seems to be valued below the market generally, and way below Apple. Another way of saying that investors expect Apple to exceed Microsoft in profitability in the near future?
ReplyDeleteInterestingly I don't know if Apple and Microsoft are direct competitors in a lot of ways. They both make computer hardware, but I think the bulk of Microsoft's revenue comes from computer software sales (Microsoft Windows, Office, and server software) while the bulk of Apple's revenue comes from consumer products (iPod, iPhone, apps, etc.). And it seems like both companies have vulnerabilities and growth possibilities in multiple areas. Thoughts?
I'm pretty sure Microsoft DOESN'T make computer hardware...unless they have bought a company that produces hardware. Microsoft has always been about providing the best Operating System that is easy to use for the general public and comes pre-loaded on pretty much every PC.
ReplyDeleteI would guess that Microsoft's projection of average growth relative to other tech companies makes sense. As far as I know, there is nothing in the next few years coming out to significantly increase their revenue. They will keep moving along making billions of dollars on software that is pre-loaded in PCs.
ReplyDeleteApple definitely has opportunity to create new customers where they couldn't before. Investors can imagine consumers buying iPhones and iPads who would have never put too much thought into buying a Mac. You now have the general public realizing they can spend less money to check their email and watch Youtube videos from the comfort of their couch instead of buying a full PC and only using 10% of its capabilities.
And as investors try to guess about future technologies, Apple seems to be leading a new field where Microsoft hasn't even started to catch up.
No I meant Microsoft makes consumer hardware in markets other than their core OS business (thinking of the Zune, the 360, etc)... my point is that they aren't really direct competitors in any one place to a meaningful degree
ReplyDeleteI still have no idea what you're talking about. Can someone please go into more detail about a Microsoft hardware product that generates revenues for them?
ReplyDeleteWell here is the Microsoft Hardware page featuring keyboards, mice, and other computer related hardware. No word on what revenue that generates.
ReplyDeleteHere is a really nice graph showing Microsoft's operating profit sources for the last 5 years. The entertainment and devices division, which includes the Zune and Xbox, made about $200 million in the recent year. That's compared to $14 billion total profit as we discussed.
Another article discussing Q1 of 2010 says that for the quarter, the entertainment and devices division "is no longer losing money, reporting $165 million in operating income on revenues of $1.7 billion". Net profit for MSFT for the quarter was $4 billion in total, so it's still a tiny slice.
And in case you ask, here is the Xbox 360, the Zune, and another hardware/software venture, the Wii-esque Project Natal.
ReplyDeleteI did know that Microsoft created the Xbox, but I did not know that kids these days are just calling it "the 360" or that the Zune was a strong competitor to the iPod.
ReplyDeleteIn fact, I'm going to take your evidence and say it supports my point more than it does yours. Microsoft makes a lot of money and will continue to make make at an "average" growth rate based on its software. Apple is creating products that are drawing in new customers and will grow at a rate greater than "average".
It bothers me to no end that Windows Phone 7 isn't coming out until "Christmas season" (which, could technically be August the way our consumer-driven society treats it). I would absolutely LOVE to see how it would fare against iOS 4. I want Windows Phone 7 to succeed, but find it hard to believe that they'll be able to make a dent in the ecosystem after missing out on so many iPhone upgraders (moving to iOS4 or Android).
ReplyDeleteThis is the one scene where I see the 2 directly battling it out over the next decade. Heck, some analysts are saying that 2012 will see more smartphone than PC shipments.
Scott, you can't just casually drop that last link in there. It's chock full of techie/business statistical goodness that directly applies to Royce's post. A couple quotes:
ReplyDelete"In just a short amount of time, Apple entered the smartphone business and now the iPhone accounts for 40 percent of its total revenues. In comparison, Macs are just 28 percent of its revenue pie, while iPods are 14 percent, followed by iTunes at 10 percent."
AND
"Internet/mobile media time spent is still “out of whack” compared to ad spend: 28 percent of time spent but only 13 percent of ad dollars. But Meeker said she was confident that that would soon work itself out."
I mean seriously, the iPhone accounts for 40% of Apple's revenue? That is so much higher than I would have ever guessed.
ReplyDeleteThat's the complete opposite of referring Microsoft's hardware as a big source of revenue.
Sorry, Royce...I still can't get over you linking to keyboards, mouses (mice? mouses?) and webcams as evidence that Microsoft is very much involved in the hardware business.
I never said 'a big scource' and I never said 'very much involved'! I said Apple and Microsoft "both make computer hardware, but I think the bulk of Microsoft's revenue comes from computer software sales (Microsoft Windows, Office, and server software) while the bulk of Apple's revenue comes from consumer products (iPod, iPhone, apps, etc.)"
ReplyDeleteHow dare you misconstrue my flawless discussion point!
And by the way I was 100% right, even if I phrased it a little hinky. The point, as illustrated just now, is that Microsoft and Apple are mostly competing in different markets, with a few minor exceptions.
You're right that the Apple revenue stat is a great one. When they say 40% of revenue from the iPhone, but then don't mention the app store or any iPhone-specific software revenue, it makes me wonder if they are lumping app revenue and all that into iPhone revenue? Which is weird cause they break out iTunes as its own revenue line item?
Also what percentage of iPhone revenue comes from their AT&T contract vs. the percentage that comes from device sales to consumers? I think that would be an interesting stat (although nobody may know it).
The internet time spent vs. ad dollars spent is SUPER fascinating to me. That says to me that the macro trend should be to be bullish on internet ad revenues in general, and that some specific companies like Google, and maybe Facebook and Twitter, still stand to benefit from their ad involvement.
Now let me bring it back full circle with a question, Aaron and Scott. So far no real competitor has emerged to the iPod, so that seems like reliable revenue for Apple. iTunes is getting a bit challenged but let's say it remains fairly constant, and Macs probably stay about even too.
ReplyDeleteWhat about the Android vs iPhone debate that Scott is bringing up? What if Windows 7 makes a dent? What if the iPad doesn't take off like Apple hopes?
Could we be looking at a situation where Apple's revenue, 40% of which comes from the iPhone, is negatively impacted by world-class competition in the smartphone market? And if so, wouldn't that make these predictions of Apple's future revenues/net income (which is supposed to surpass Microsoft's) shaky at best?
People are betting on Jobs and against Ballmer for that last piece. I, personally, think APPL is a bit over-valued, while MSFT is a bit under-valued. But, that's based on Windows Phone 7 performing well (which, I believe it will). If it flops, then MSFT is properly-valued.
ReplyDeleteScott already provided the answer in his two links above.
ReplyDeleteApple will lose some of its market share as Windows and Android catch up to Blackberry and the iPhone, BUT the overall market of smartphones will continue to rise. Only 23% of all mobile customers are using a smartphone. I would not be surprised if that number rises to 80% in the next 10-15 years. Apple doesn't need to dominate the smartphone market to see it's revenues increase. The iPhone is going to be the leader as the the overall market for smartphones increases.
(I say the iPhone will pass the Blackberry as the biggest smartphone because non-business consumers are more likely to flock to the iPhone and Android than the Blackberry.)
Aaron that is a fantastic point and very well-stated. And Scott I think your analysis is interesting, and makes me wonder about the basic assumptions.
ReplyDeleteBasically it all comes down to degrees. We can all probably agree that more smartphones are going to exist in the coming years, and we can all agree that lots of companies are getting in on the action. The question that's tough to answer is to what degree each of those companies has success compared to their peers.
Right now it looks like the market is predicting Apple to have way more success than anyone, and Microsoft to have not so much success. Scott you think the market is a little overzealous. I probably agree. Aaron sounds like you think the market is about right?
I could agree that Wall Street is a little overzealous on Apple (barely), but I think Microsoft is appropriately priced. There hasn't really been any indicator that Microsoft's Windows Mobile OS is ready to compete with Android, iPhone and RIM. Until we see some sign that Microsoft has stepped up its game, there's no reason for MSFT to grow any faster than average.
ReplyDeleteThanks for the echo Aaron...
ReplyDeleteBTW - Nielsen projects Smartphones to surpass Feature Phones in the US by end of 2011, so you're 80% in the next 20-15 years seems very attainable.
And Royce, at 9:10 you finally effectively defended yourself. You clearly identified your own logical reasoning and the errors in my argument.
ReplyDeleteAfter, my initial thoughts, I realized that you actually did say that Microsoft's hardware weren't significantly relevant to their revenue, but instead of pointing that out, you jumped to defend Microsoft's hardware. You should have attacked me saying that the hardware they do make has nothing to do with the point you were trying to make.
So really, you brought it on yourself.
Today's Tech Thursday link to this post reminded me of my vicious beatdown in the comments here at the hands of Aaron. Ouch.
ReplyDeleteIt also reminded me to continue revisiting this discussion... these companies do appear to be increasing their competition in many different spheres of the tech world.